Synlait Milk Limited Annual Report 2014

Plain-text annual report

BUILDING Synlait Milk Limited Annual Report 2014 BLENDING & CONSUMER PACKAGING MO. .. Our state-of-the-art blending and consumer packaging facility has world class operating efficiency and quality standards. Our customers now have a complete product supply solution with total integrity, from raw milk sourcing through to retail packaging. COMPLETED JULY 2014. LACTOFERRIN EXTRACTION & PURIFICATION FACILITY MOMEN. .. We’re one of only two manufacturers world-wide with the capability to produce lactoferrin as a spray-dried powder. Our process is designed to protect its bio-activity and increase its solubility, something our infant formula, health food and pharmaceutical customers demand. COMPLETED APRIL 2014. MOMENTUM 22,500M2 DRYSTORE Our new 22,500m2 drystore enables all inwards goods and finished product to be stored at our Dunsandel site. Now with product manufacture, packaging, and containerisation for export all on one site our customers can have complete confidence in the integrity of their product. COMPLETED APRIL 2014. CONTENTS Trend Statement Pg 2 Our Partnerships Pg 14 Our Place Pg 18 Chairman’s Report Pg 4 Managing Director’s Report Pg 8 Sponsoring A Splashing Goodtime akaraTM Inspired By Akaroa Advancing Nutrition With Mead Johnson The Platinum Standard In Infant Formula Supplier Conference 2014: Destination Shanghai Presence Leading With Pride™ Recognition For Environmentally Minded Supplier Sustainable Dairying Accord Responsible Dairy Processing 22,500m2 Of Additional Storage Dedication To A Single Site Synlait Milk Limited Annual Report 2014Our Process Pg 22 Our People Pg 26 Our Future The Formula Of Our Blending And Consumer Packaging Facility Creating A Leadership Culture Synlait 101 Our Remuneration Our Governance Pg 29 Pg 32 Pg 34 Pg 38 Lactoferrin Extraction And Purification Facility Quality Under The Microscope Everyone Home Safe Every Day Our Board Of Directors Great People Our Senior Leadership Team Pg 40 Our Financial Review Pg 42 Our Financial Statements Pg 46 Auditors Report Statutory Disclosures Directory Pg 94 Pg 96 Pg 106 I PAGE 1 Synlait Milk Limited Annual Report 2014KEY PERFORMANCE INDICATORS TREND STATEMENT Gross Profit per Metric Tonne (MT) (NZD) Earnings Before Interest, Taxes, Depreciation and Amortisation (In millions NZD) 824 751 FY2014 FY2013 Return on Capital Employed 11.5% 13.1% 50 40 30 20 10 0 15 12 9 6 3 0 43.8 38.5 FY2014 FY2013 Earnings per Share (Cents) 13.40 10.21 FY2014 FY2013 FY2014 FY2013 10 8 6 4 2 0 15 12 9 6 3 0 PAGE 2 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014KEY PERFORMANCE INDICATORS Trend Statement Currency as stated (in millions) FY2014 FY2014 FY2013 FY2012 FY2011 FY2010 Actual PFI* Actual Actual Actual Actual Financial performance Revenue Gross profit Earnings before interest, taxes, depreciation and amortisation (EBITDA) Earnings before net finance costs and income tax (EBIT) Net profit after tax (NPAT) Revenue (USD per MT) Earnings per share (EPS) Gross profit per MT (NZD) EBIT per MT sold (NZD) Net cash from / (used in) operating activities1 Balance sheet Total assets Capital employed 600.5 524.4 420.0 376.8 298.9 233.4 77.1 43.8 76.4 44.0 65.1 38.5 46.0 22.1 21.1 4.8 23.7 10.2 32.4 32.1 28.3 13.4 - 5.3 19.6 5,214 13.40 824 349 58.7 476.9 335.2 19.7 4,438 13.44 832 349 98.3 380.4 272.4 11.5 3,894 10.21 751 326 (47.1) 346.1 231.0 4.4 3,644 5.62 594 174 29.7 277.3 195.3 7.3% 0.78 6.14 (3.1) 3,848 (3.21) 385 (10) 9.2 245.3 170.8 0.0% 0.73 7.66 (11.7) 2,882 (21.21) 462 124 13.8 151.0 102.4 5.0% 0.64 6.21 Net return on capital employed (pre-tax) 11.5% 12.6% 13.1% Foreign exchange rate (NZD:USD) Synlait contracted milk price (kgMS)2 0.81 8.27 0.81 5.80 0.80 5.81 Key Operational Metrics FY2014 FY2014 FY2013 FY2012 FY2011 FY2010 Sales Ingredients 87,248 80,435 81,085 73,003 54,648 51,271 Infant formula and nutritionals 6,396 11,465 5,661 4,412 238 - Total sales (MT) Production Ingredients Infant formula and nutritionals Total production (MT) Milk purchases 93,644 91,900 86,746 77,415 54,886 51,271 89,276 79,262 7,216 11,684 96,492 90,946 81,148 10,081 91,229 76,661 53,807 49,729 4,737 608 294 81,398 54,415 50,023 Milk purchased from contracted supply 47,903 46,400 42,076 37,572 24,934 21,865 Milk purchased from Fonterra and other suppliers 2,033 - 4,692 6,453 4,524 4,525 Total milk purchases (kgMS in thousands) 49,936 46,400 46,768 44,025 29,458 26,390 * Prospective financial information. 1 Net movements in the trade finance facility is now classified as a financing cashflow as opposed to operating cashflow. All comparative and forecast information has been regrouped accordingly. 2 Base milk price for Synlait Milk suppliers on standard milk supply contract, excludes premiums paid. I PAGE 3 Synlait Milk Limited Annual Report 2014CHAIRMAN’S REPORT Graeme Milne CHAIRMAN PAGE 4 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014CHAIRMAN’S REPORT Continued growth underscores our sixth year of operation. Our drystore expansion was completed on time in April 2014 Exporting over 90,000 metric tonnes (MT) of added value dairy at a cost of $17.0 million, our new lactoferrin extraction and ingredients and nutritional powders has lifted our revenue to purification facility was completed in April 2014 at a cost of more than $600 million. FINANCIAL OVERVIEW $21.9 million (the first product sales having already occurred) and our blending and consumer packaging facility was completed on time in July 2014 at a cost of $29.2 million. Our focus during FY2014 has been to deliver on the promises As we enter FY2015, work is well underway with other growth we made to shareholders in our investment statement and initiatives. Construction has begun on our new administration prospectus on 24 June 2013. Financially, we have delivered. building and quality testing laboratory, estimated to cost $21.0 Revenue, at $601 million, is well above the prospective million. Our next large scale infant formula capable spray financial information (PFI) target of $524 million. Buoyant dryer, dryer three (D3), is also underway with an estimated world market prices through the majority of the reporting total capital cost of $135.0 million and a completion date of period were a large contributor to our revenue. Profitability September 2015. Our butter manufacturing plant is currently was on target with our PFI, with gross profit being $77 million being designed with a view to build in FY2016. These projects and earnings before interest and taxes (EBIT) at $32 million. will equip us well for significant future growth in both scale Net profit after tax (NPAT) was slightly under the PFI target and profitability. of $19.7 million at $19.6 million, however this is well up on FY2013’s $11.5 million profit. INTERNATIONAL MARKET CONDITIONS Our result was achieved with a number of positives and Our vision is focused on becoming a trusted supplier of negatives to the original plan. Positively, world market prices choice to the world’s leading milk-based health and nutrition for our major products stayed firm for the first seven months companies. Our business is strongly influenced by the global of FY2014 and firmer than other dairy based products, dairy commodity market, both in terms of market prices and such as cheese and casein, which we do not manufacture. consequently farm gate milk prices. This advantage, however, was largely eliminated by two countervailing factors. In our FY2013 Annual Report we predicted high milk powder prices, in excess of USD $5,000 per MT, could not last due to The first was the very same high-priced market. In these consumer resistance and production increases in the United circumstances, it becomes very difficult to achieve targeted States of America and the European Union. All this has come premiums and gross margin for specialised ingredients. to pass with a major reduction in commodity prices, starting Market uncertainties in China meant our key infant formula in March 2014 and continuing through to the close of FY2014. market was the second major factor. While regulations changed and requirements were clarified, key customers were forced to delay and in some cases cancel orders, which also lead to significant stock write downs, reducing production volumes below target for the year. Despite this, the sales of infant and nutritional products were 13% up on the previous year from 5,661 MT in FY2013 to 6,396 MT in FY2014. GROWTH INITIATIVES The second major target in our investment statement and prospectus was to establish the next phase of the company’s development, both in market and physically at our site in Dunsandel. The growth initiatives are proceeding well with three projects now completed. Milk powder prices have fallen from USD$5,000 per MT to less than USD$3,000 per MT in this short period. While the value of the New Zealand Dollar has decreased, these prices translate to a farm gate return of approximately $4.50 per kg of milk solids (MS) (August 2014), down from a peak of $9.50 per kgMS (February 2014). Milk suppliers will actually receive an annual average of these prices. For our milk suppliers, the average total milk price in FY2014 was $8.31 per kgMS, which was well up on FY2013’s $5.89 per kgMS. With such volatility, it is extremely difficult to predict international prices with any certainty. However, it is clear that demand from developing economies will continue to increase. I PAGE 5 Synlait Milk Limited Annual Report 2014CHAIRMAN’S REPORT CONTINUED What is less clear is whether raw milk supply will be under GOVERNANCE or over demand, in a market that is currently oversupplied. The soft period is forecast to last at least until end of the 2014 calendar year and could well be longer. While volatility produces uncertainty, low or high prices are manageable within our business plan and do not fundamentally undermine profitability. We have strong risk mitigation policies and procedures around sales and foreign exchange hedging, which are both key to manage the volatility risk. Our value added ingredients and nutritional products strategies provide further resilience by not only adding margin, but also by reducing the proportion of ingredients in final products being based purely on milk. MILK SUPPLY Our total number of milk suppliers increased from 148 in FY2013 to 161 in FY2014. Along with the increased number of contracted farms we have reduced the average distance from supplier farms to our Dunsandel manufacturing site to 45km, bringing cost and production efficiencies. Our Lead With PrideTM farm quality assurance programme, launched in FY2013, has received strong support from our milk supply base with over a quarter of our suppliers actively working through the programme. Our second annual milk supplier conference was well received by our milk supply base and customers who attended. PEOPLE Many talented individuals have joined the company during the year. Staff numbers have increased from 171 in FY2013 to 238 in FY2014. Our focus on leadership development remains central to the business. During FY2014 our first leadership conference was held for all staff in leadership positions. External speakers, including myself, shared skills and insights with our team, with that knowledge now being applied throughout our business. Dr. John Penno, our Managing Director, continues to skillfully lead the company during this period of considerable growth. John has travelled extensively this year, leading the development of key customers and markets and gaining personal insight into the Chinese regulatory requirements. My thanks go to John, the Senior Leadership Team and the Our Board of Directors have been involved in market development during FY2014, visiting key customers in Singapore and Shanghai to gain in-depth insights into customer and market dynamics. I would like to thank all of our Directors. In particular, Bill Roest as Chair of the Audit and Risk Committee and Ruth Richardson as Chair of Remuneration and Governance Committee, who have served the company admirably. During FY2014 a comprehensive review of our Director’s effectiveness was conducted by an external advisory group. Our Board is diverse in culture, ethnicity, language, gender, skills, experience and location. Several insights were gained from this review on which we will be able to leverage to the advantage of the company. SHAREHOLDERS RETURN Shareholders return this year was a pleasing increase of 33% from a closing share price on July 31 FY2013 of $2.61, to a closing share price of $3.46 on July 31 FY2014. The Directors, in line with indications in our investment statement and prospectus, have not declared any dividends this year. Given the continued profitable growth prospects planned, we do not expect to declare any dividends at least for the immediate future. OUTLOOK During FY2015 we will continue to invest in our growth initiatives, particularly D3. Improvements in returns through increased sales in the infant formula and nutritional markets will, however, be largely balanced by increased operating and funding costs. We are confident in our future outlook and look forward to continuing to work for shareholders during 2015. Graeme Milne whole staff for their efforts during the course of FY2014. CHAIRMAN PAGE 6 I Synlait Milk Limited Annual Report 2014 Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014 I PAGE 7 MANAGING DIRECTOR’S REPORT John Penno MANAGING DIRECTOR PAGE 8 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014MANAGING DIRECTOR’S REPORT MARKET DEVELOPMENT Our vision of becoming the trusted supplier of choice to the world’s leading milk-based health and nutrition companies is building momentum. In the coming year we expect that approximately half of our milk powder business will be sold into the infant formula and nutritional markets. This will be in the form of finished retail-ready infant formula marketed and distributed by our customers, infant formula base powder that is finished and retail packed by our customers, or as milk powder used as an ingredient in infant formula made at our customers’ manufacturing sites. We now produce product for four of the world’s five leading multinational infant formula companies, together representing 52% of the global infant formula market by volume. We are in ongoing discussions with each of them about developing our relationship to include increased volumes, the manufacture of higher value products as well as co-operating on research and development opportunities. The development of these relationships supports our sales strategy to have 70% of our business with leading multinational customers. This strategy will ultimately drive increased volume, reduce the number of customers we work with and bring production efficiencies to our business. The strategy allows for 25% of our business to be with regional market leaders, companies that hold leading positions in country specific regional markets and are typically innovative and nimble. Bright Dairy with their Pure CanterburyTM infant formula brand and New Hope Dairy with their akaraTM infant formula brand are examples of regional leaders in China. The remaining 5% of our business is targeted at companies that have a unique position in the market with growth potential and high value, such as The a2 Milk Company with their a2 Platinum® infant formula. Our core business strategy remains firmly business to business. This enables us to scale quickly and isolates us from the risk of investing in brand development. Importantly, it assures our customers that we are not going to compete with them. During FY2014 our new lactoferrin extraction and purification facility became commercially operational. We are now one of only two manufacturers world-wide with the capability to produce lactoferrin as a spray-dried powder, through a process designed to protect its bio-activity and increase solubility. We have learnt our lactoferrin is well suited to pharmaceutical applications and as a result some of our largest customers have become pharmaceutical companies. This opens up some interesting new relationships for this business. $ Breakdown of Sales Strategy 70% 25% 5% Multinationals Regional Market Leaders Unique Positioned Companies I PAGE 9 Synlait Milk Limited Annual Report 2014MANAGING DIRECTOR’S REPORT CONTINUED CHINA REGULATIONS While the ongoing development of the business was pleasing during FY2014, it occurred in the face of significant volatility, not only in international dairy prices but also in the regulatory regime changes for the importation of dairy products, particularly infant formula in China. China remains the focus for most global infant formula Peoples Republic of China (CNCA) to be registered as a dairy and infant formula manufacturer in February 2014. In March we were invited, along with a small number of New Zealand companies, to present to the CNCA in Beijing. In April we were inspected by a CNCA-led audit team from China, to become an exporter of general dairy products and infant formula base powders. We passed the audit and on 1 May 2014 our factory was registered to export these products companies due to the nation’s growth, increased urbanisation, to China. higher disposable incomes and relaxation of the ‘one child’ policy. In our FY2013 financial report and FY2014 half year report, we focused on the significant regulatory changes for the infant formula industry that were occurring in China. We continue to support these changes that seek to increase the quality and safety of infant formula products available to Chinese consumers. This will ensure that only companies capable of attaining and assuring world leading quality standards are able to sell their brands in the Chinese market. Part of the new regulatory regime is to register all factories manufacturing infant formula products for the Chinese market, and to register any brands imported into China against a registered factory. There is also a stated policy intent to ensure that there is a close association between the brands and factories such that it is clear that the manufacturing company is prepared to stand behind the quality of the branded product in the market. Under these regulations we made an application to the Certification and Accreditation Administration of the The only exception is for exports of finished infant formula to China. Documentation required to support our application for registration as an exporter of retail-ready infant formula to China was sent to the Chinese regulatory body on 28 August 2014 by the Ministry for Primary Industries (MPI). This followed the approval of our Risk Management Programme by MPI for our blending and consumer packaging plant. The brands we applied for registration against our factory included Pure CanterburyTM, akaraTM and a2 Platinum®. These regulation changes were well signalled in our initial public offering (IPO) prospectus and investment statement released 24 June 2013. The development of our Dunsandel site to include long term contracts for raw milk supply, batch liquid blending and spray drying, powder blending and consumer packaging all on one site with a full label claim laboratory was designed to meet the prescribed model for Chinese infant formula manufacturers. It is not a coincidence that it is also the preferred configuration for multinational infant formula companies, as this provides end-to-end manufacturing integrity. PAGE 10 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014MANAGING DIRECTOR’S REPORT CONTINUED In fact, we are pleased to announce we have entered into a Our blending and consumer packaging line was completed conditional agreement, subject to certain approvals, for a 25% on time and commissioned in July. Customer feedback has shareholding in Sichuan New Hope Nutritional Foods Co., confirmed that this is a world class line in terms of operating Ltd., the company responsible for the ownership, sale and efficiency and product quality standards. With a processing distribution of the akaraTM branded infant formula range in capability of 30,000 MT per annum it is a large capacity China. Through a small investment, the partnership will create line, making it a cost competitive solution for large volume an integrated supply chain for the manufacture, packaging, customers. supply, distribution and sale of akaraTM to consumers in China, ensuring transparency back from can to paddock. With our target multinational customer development advancing faster than we had anticipated, we announced It is pleasing to report that the disruption caused to the mid-year that we were increasing the capacity of our second Chinese market seems to be easing. A large number of locally manufactured and imported brands have withdrawn from the Chinese market during FY2014, giving rise to increased demand for remaining brands. We are also seeing Chinese base powder customers returning to the international market. As a New Zealand based infant formula manufacturer, with milk supply, spray drying and blending and packaging on a single site, we believe we are well positioned to continue engaging with these customers and will continue to participate in this part of the market. To support our growth in China we are in the process of establishing a sales office in Shanghai. This office is a shared facility with a small group of leading New Zealand primary producers, and is further supported by New Zealand Trade and Enterprise. This recognises the importance of this market to our future, the increasing depth of relationship required with our chosen customers and the sophisticated product portfolio we have chosen to specialise in. GROWTH INITIATIVES large scale infant formula spray drying plant (D3) from 8 MT per hour to 10 MT per hour (whole milk powder (WMP) equivalent). Tetra Pak, who built our existing large scale infant formula spray dryer, were awarded the build contract to deliver operational efficiencies from the application of a similar design to the existing plant. This plant is now under construction with commissioning expected in September 2015, ready for the FY2016 season. By the end of the coming year, this will give the total site processing capacity of about 150,000 MT, including 50,000 MT of infant formula products, 30,000 MT of finished consumer packed infant formula, 23 MT of lactoferrin and 25,000 MT of anhydrous milk fat (AMF). With our technical centre of excellence in place it will make our Dunsandel site one of the largest and most technically advanced infant formula and nutritional manufacturing sites in the world. MILK SUPPLY We continue to enjoy strong support from contract milk suppliers. In FY2014 the number of supplying farms has grown from 148 to 161. This includes replacing 20 farms that had been supplying milk from South Canterbury under Under Mike Stein, General Manager of Quality and Technical Oceania contracts. These new farms are located closer to our Services, we are developing our quality systems to meet the production facility making our milk collection more efficient. standards expected by our infant formula and nutritional All of our supplying farms are now on a standard three year customers. Under Mike’s leadership, we made the decision contract, with all contracts automatically extending for a to establish an on-site ‘centre of excellence’ and increase the further 12 months on their anniversary unless one party scope of our proposed quality testing laboratory from chemical indicates their intention to end the agreement on expiry (after and physical property testing to include full microbiological a further two seasons). This means at the start of each season testing, as well as integrated facilities to support new product we have milk supply security for the next three years. development. This will be incorporated into the ground floor of a new building that will also provide a productive and collaborative working environment for our office-based staff. In FY2015 we expect to contract a further 40 supplying farms. This will provide the additional milk volume required for the commissioning of D3 in FY2016. The strong support we have received in FY2014 gives us confidence that we will be able to meet this target. I PAGE 11 Synlait Milk Limited Annual Report 2014MANAGING DIRECTOR’S REPORT CONTINUED The Lead With PrideTM on farm quality assurance programme THANKS is becoming a key foundation to our customer development programme. Suppliers have responded favourably to this Finally, I would like to acknowledge the dedication of our team. very demanding programme recognising its value, not only While our Company is an exciting place to be, it is to our strategy, but also to their businesses. We now have seldom easy to work in such a fast paced and demanding approximately a quarter of our suppliers actively working environment. I acknowledge all my staff for the ongoing their way through the programme. It was pleasing to receive effort they make, not only in doing their jobs efficiently and approval from Environment Canterbury for Lead With PrideTM effectively, but also continually striving to improve the way we as a farm environment plan template, the first of its kind under are doing things and the outcomes we are achieving. the proposed Land & Water Regional Plan in Canterbury. Each and every day the Senior Leadership Team continues to The coming season is likely to be challenging for dairy rise to the challenge of working with me to lead the business farmers with the recent period of high prices resulting in as it continues to grow and develop – they are great people slowing demand from consumers, and significant increases and I love working alongside them. in milk production around the world. These conditions have resulted in an oversupply of dairy and a rapid decline in dairy commodity prices, which will directly translate into lower farm gate milk prices. PEOPLE The anticipated growth in demand for our products and our developing engagement with our customers has driven the development of our team, our processes and our plant and equipment. To recruit the right people and have them develop in their roles quickly, we have invested heavily in our human resources team. We now have a comprehensive induction process all new employees must complete, as well as extensive leadership training for all people managers. To reflect the growing scale of the business and the way our customer relationships have developed, our Senior Leadership Team was reorganised. The most significant change was to move from two product category based sales teams, to a single customer-focused sales team now led by Mike Lee, General Manager Sales. I would like to acknowledge the ongoing support that I receive from our Board of Directors. I believe that shareholders, staff, customers and suppliers are well served by a Board focused on building a great business. I would like to thank our suppliers for their continued support and dedication to producing quality milk. Without their attention and commitment to high-quality and sustainable dairy farming practices, we would not have such a premium core ingredient for all of our products. I would also like to thank our shareholders for their ongoing support and commitment. We continue to enjoy a strong relationship with our corporate shareholders Bright Dairy and Food Co. of Shanghai, Mitsui of Japan and FrieslandCampina of the Netherlands, who have grown their shareholding during the year from 7.50% to 9.99%. I acknowledge the support of our institutional and private shareholders. We will continue to commit to effective communication with you in order to keep you well informed and allow you to feel connected to building a great company as we continue to make more from milk. John Penno MANAGING DIRECTOR PAGE 12 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014BUILDING MOMENTUM ON THE WORLD STAGE I PAGE 13 Synlait Milk Limited Annual Report 2014OUR PARTNERSHIPS PAGE 14 I Antonio Rivera, Vice President, Supply Chain Asia and Europe presents at our supplier conference. Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014OUR PARTNERSHIPS SPONSORING A SPLASHING GOODTIME The opening of the Selwyn Aquatic Centre in June 2013 was highly anticipated amongst the local Rolleston community, who had previously been without a public pool. Developed with their community needs in mind, the $14.7 million facility In early 2014 New Hope Dairy launched a range of infant formula products that have been manufactured by us. Called akaraTM,, the infant formula is named after the French settlement of Akaroa in Canterbury. The brand mascot is a Hectors dolphin, which symbolises their brand’s purity and affinity with the region. includes an eight lane 25 metre pool, a hydrotherapy pool with The akaraTM brand has a three tier product range in the high spa area, a learn-to-swim pool and a leisure pool. to mid-range price points. The product has wide distribution A fundraising campaign was launched to fill a funding gap throughout China. of $1.5 million, and $10,000 was committed to the campaign The marketing of akaraTM has utilised traditional advertising in support of the community value the centre delivers. Many such as television commercials, and has also engaged a highly of our team and their families live in Rolleston and the wider sophisticated social media campaign. Selwyn District, and with a large number of our milk suppliers also in the area, we’re well aware of how beneficial this facility is to people of all ages. Targeted at new fathers, the social media campaign has encouraged consumers to follow the akaraTM brand via Weibo and WeChat (China’s version of Facebook and Twitter). The Whether it be swimming lessons, a school holiday programme campaign has also offered a competition where by consumers for children or an aquafitness class, the fun, safe and vibrant share photos of themselves and their new born child in order atmosphere at the Selwyn Aquatic Centre is something we’re to win a trip to New Zealand to discover the home of the proud to support in our community. akaraTM product. akaraTM INSPIRED BY AKAROA Based in Chengdu, with annual sales of around USD$8.8 billion, New Hope Group is one of the largest agribusinesses in China with more than 400 subsidiaries and over 80,000 employees. We have hosted over 40 consumers and media as part of this promotion. During their time in New Zealand the competition winners visited our headquarters where they were able to talk with members of our Senior Leadership Team, have a tour of our manufacturing facility and visit a supplying farm and witness milking. In return, the competition winners shared their experiences via social media. New Hope Dairy is a leading subsidiary of the New Hope Group. The division has proven manufacturing and marketing experience in yogurt, high-end chilled milks, innovative milk products and flavoured milks. To further support the social media campaign, we work alongside one of our milk suppliers to write a weekly blog that is shared with their Chinese consumers educating them on what happens on farm to create the milk for infant formula. Sales of akaraTM have been successful and over the coming financial year the product will be one of our leading infant formula customers. I PAGE 15 Synlait Milk Limited Annual Report 2014OUR PARTNERSHIPS CONTINUED ADVANCING NUTRITION WITH MEAD JOHNSON Headquartered in Glenview, Illinois, Mead Johnson is a global leader in paediatric nutrition. For more than a century, Mead Johnson has led the way in developing safe, high-quality and innovative products to help meet the nutritional needs of infants and children. With more than 70 products in over 50 countries and more than 7,000 staff, Mead Johnson products are trusted by millions of parents and healthcare professionals around the world. Mead Johnson is committed to advancing the science of paediatric nutrition around the world. To further its efforts, the company has established the Mead Johnson Paediatric Nutrition Institute (MJPNI). The MJPNI connects innovative scientific technology and research with cutting- edge manufacturing, as well as educational initiatives for academics, healthcare professionals and consumers. THE PLATINUM STANDARD IN INFANT FORMULA New Zealand-listed company The a2 Milk Company™ has a distinct point of difference in the global dairy market. While most cow’s milk contains both A2 and A1 beta-casein protein, The a2 Milk Company™ markets and distributes milk products that exclusively contain the A2 protein. It is believed a2 Milk™ is easier on digestion. Evidence suggests this is due to the milk being free of A1 beta casein. Interestingly this makes milk free from A1 beta casein more like human breast milk, which is also ‘A2’ like in terms of protein structure and the way it digests. The company has had success in Australia with fresh milk products. a2 Milk™ is Australia’s fastest growing milk brand in supermarkets achieving approximately 9% value share. In early 2012 we entered into a supply agreement with The a2 Milk Company™. This involved working with a number of our milk suppliers who had expressed an interest in converting We were pleased in FY2014 to start supplying Mead Johnson with added- value milk powder products. Securing this contract was a major milestone for us and marks the start of what we believe will be a long-term partnership with the company. A testament to the nature of our relationship, representatives of Mead Johnson attended and presented at our FY2014 milk supplier conference. Our milk suppliers greatly appreciated hearing from Mr. Antonio Rivera, Vice President, Supply Chain Asia and Europe at the event. PAGE 16 I their herds to cows that don’t produce the A1 beta casein protein. This involves a simple and non-invasive proprietary DNA test to select and segregate the cows to exclusively produce milk that is naturally free of A1 beta casein. Today 17 of our supplier farms take part in supplying a2 MilkTM. In addition to on-farm genetics, a2 milkTM must be collected and processed separately from our standard milk supply. The milk produced by our supplier farmers and processed by us is used to create a2Platinum®, the only infant formula range using exclusively the all-natural A2 protein and free from A1 beta casein protein. Launched in 2013, the product is distributed in China, Australia and New Zealand. To date sales of a2 Platinum® have exceeded expectation, particularly in the Australian market. It is forecast over the coming financial year that a2Platinum® will be one of our leading infant formula customers. We continue to work collaboratively with The a2 Milk Company™ to provide sales and marketing information for promotional purposes and hosting media and distributor delegations at our facility. Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014OUR PARTNERSHIPS CONTINUED SUPPLIER CONFERENCE 2014: DESTINATION Fostering understanding between our raw milk suppliers and our customers is of particular importance to us. Creating this link allows our milk suppliers to gain a better appreciation for the high standards our customers expect and our customers are able to witness the level of passion our supplier base has for producing high quality milk. SHANGHAI PRESENCE As our nutritional business grows in China, we’ve partnered with other primary industry businesses in New Zealand to establish a shared services company in China. Once established, this company will be a wholly foreign owned enterprise (WFOE). It will provide office facilities and administrative support staff in central Shanghai for representatives of members working in the dynamic Chinese market. The key event we have for encouraging this relationship is our annual milk supplier conference. The conference connects For us, this partnership is another step in building our relationship with customers and decision makers in the suppliers with where their milk goes. This year over 300 of Chinese market. our milk suppliers and rural professionals attended the day conference and gala dinner, themed ‘Destination’, to build the connection between our suppliers and customers. Guests enjoyed market commentary from ANZ Chief Economist Cameron Bagrie and DairyNZ Principal Scientist Dr.John Roach, in addition to hearing We think our on-ground presence will enhance our reputation in China, ultimately building and communicating awareness of our mission to supply the world’s best milk products and nutritional ingredients to the world. from representatives from some of our customers, including Mead Johnson, New Hope Group and Hoogwegt Australia. Following the day event guests enjoyed a gala dinner that featured cultural elements and a menu inspired by our largest export market, China. During the course of the evening, guests were entertained by All Black legend Eric Rush’s travel stories. Feedback from delegates and international guests was largely positive, with many looking forward to next year’s event. I PAGE 17 Synlait Milk Limited Annual Report 2014OUR PLACE PAGE 18 I Synlait Milk Limited Annual Report 2014 Synlait Milk Limited Annual Report 2014OUR PLACE Looking after our place is important to us. We’ve implemented several initiatives to manage our impact on the environment, and this year our focus was to build on these and realise their environmental benefits. RECOGNITION FOR ENVIRONMENTALLY MINDED SUPPLIER Our inaugural Supplier Environmental Award was announced at the 2014 Supplier Conference in July 2014. Recognising environmental leadership, the award celebrates how agricultural production can go hand in hand with environmental preservation. A South Canterbury supplying farm, owned by New Zealand Super Fund and operated by Aaron and Frances Coles, won the award for their hand in preserving the quality of Ohapi Creek, a freshwater stream that runs through the farm. Fencing stock off from waterways, carrying out riparian planting and maintaining water quality on farm led to the site being chosen to release 7,000 young salmon for the second year in a row. We’re proud that this farm was chosen to be a part of the joint conservation effort between Fish and Game and the McKinnons Riparian Support Trust. LEADING WITH PRIDE Our Lead With Pride™ programme has been well received in its second year. More than a quarter of our milk suppliers are currently working through the programme in a commitment to dairy farming excellence. The four pillars of environment, animal health and welfare, milk quality and social responsibility set out criteria benchmarked against best practice. Canterbury’s regional council, Environment Canterbury, approved Lead With Pride™ as their first farm environment plan template in July 2014. Dairy farmers have obligations under the Canterbury Water Management Strategy to manage environmental risks effectively, and Lead With Pride™ exceeds the minimum requiremen ts to achieve this. “We hope the farm environment plans that come from this template are valuable both for farmers and for Synlait,” said Bill Bayfield, Chief Executive of Environment Canterbury. To see how Lead With PrideTM demonstrates industry leadership and best practice, visit synlait.com. I PAGE 19 Synlait Milk Limited Annual Report 2014OUR PLACE CONTINUED SUSTAINABLE DAIRYING ACCORD RESPONSIBLE DAIRY PROCESSING We are committed to the Sustainable Dairying: Water Accord Our Dunsandel site is evolving each year as a result of growth (SDWA), a New Zealand memorandum of understanding initiatives. Making sure we take care of our environment is a (MoU) amongst dairy industry regulators, associations and focus for us, and we share the passion of our customers and businesses to enhance the overall performance of dairy suppliers for being a responsible dairy processor. farming as it affects freshwater. A review of our site stormwater system identified the SDWA requires dairy farms to exclude dairy cattle from opportunity to enhance infrastructure around heavily significant waterways and wetlands, undertake riparian trafficked areas by reconstructing our infiltration basin. planting where benefits to water quality exist and ensure Replacing the original basin allowed us to meet current best crossing of dairy cattle will not result in the degradation of practice standards, with a design that simplifies functionality waterways. and maintenance. Many of our suppliers have already fulfilled SDWA We undertook measures to refine and expand our loss requirements through their involvement in Lead With Pride™, monitoring system. Integrating turbidity sensors and with 97% of waterways already mapped and systems in place continual samplers into the plant enables us to collect more to monitor and manage nutrients, effluent waste and robust data and better quantify our waste streams. water use. We will work with existing and new suppliers to ensure they fulfil their role as responsible dairy farmers, and we deliver on our commitment to SDWA. The addition of a rapid infiltration basin awards further gains in managing our clean wastewater stream, effectively conveying large volumes of clean wastewater quickly and safely to the ground. As a net positive water user, we return more water to the environment than we use to operate. We will continue to deliver on our environmental commitment and look forward to other initiatives in the next financial year. PAGE 20 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014OUR PLACE CONTINUED 22,500M2 OF ADDITIONAL STORAGE DEDICATION TO A SINGLE SITE The second of our six growth initiatives identified during our The rapid growth of our business has resulted in there being initial public offering was completed in April 2014. a shortage of office space. Currently this has been resolved The 22,500m2 drystore now gives us the capability to warehouse all finished product and inbound goods at our Dunsandel headquarters. The additional space also provides our customers with increased confidence with packaging and containerisation for export, now occurring at a single site. through the purchase or lease of portable buildings. However, this has long been recognised as a short-term solution. Our long held vision has been to position our Dunsandel site as the ‘flagship’ site for the Company. To support this vision a master planning exercise was undertaken with architecture firm Jasmax, leading to the existing concept and design that we have today incorporating a modern administration office Increased drystore capacity was required to meet our growing and a state-of-the-art quality testing laboratory. processing ability with the addition of D3 in 2015. Following this, Calder Stewart were awarded the construction However, there was also a need to consolidate our previous project and have now completed building designs and are preparing the site for building. Unispace is leading the interior design and internal fit out of the administration office. The existing permanent office space will be refurbished to a high standard to provide meeting spaces, a café and additional staff facilities. Due for completion in June 2015 the new building will accommodate all administration staff, physically connect the administration office and the manufacturing facilities, support a number of working styles and promote our vision of being one team. We look forward to sharing more about this project with you in the future. warehousing options that had become increasingly fragmented in post-earthquake Christchurch, as the availability of food grade warehousing had decreased. The new drystore has a capacity of 30,000 pallet spaces and increases total site capacity to 35,000 pallet spaces. Storing and exporting our product from one site has increased operational efficiencies. Prior to our increased capacity, finished produced was handled a minimum of nine times before export, today that has reduced to a minimum of four times. Less handling of finished product dramatically reduces our risk of product damage and also reduces our staffing costs. In addition to the drystore expansion, the site also features a new fleet of forklifts. These are equipped with the latest emissions technology, anti-collision software and speed limiters that help to keep our people safe. We are now looking forward to developing further efficiencies and flexibility with the confirmation of Lyttelton Port and Port of Tauranga developing in-land ports at Rolleston, a short distance from our Dunsandel site. I PAGE 21 Synlait Milk Limited Annual Report 2014OUR PROCESS PAGE 22 I Synlait Milk Limited Annual Report 2014 Synlait Milk Limited Annual Report 2014OUR PROCESS THE FORMULA OF OUR BLENDING AND CONSUMER PACKAGING FACILITY Our blending and consumer packaging facility was completed in July 2014. It was our intention to build the best facility of its type in the Southern Hemisphere, and feedback from customers who refer to the plant as ‘next generation’ affirms our goal. The $29.2 million facility can process 30,000 MT per annum, or up to 110 cans per minute. The facility is capable of processing both 400 gram and 900 gram can formats and is designed for expansion toward other packaging variants. The plant features leading European equipment and a three- zone hygiene system. Automation has been effectively used throughout the line to reduce the amount of physical handling of product and a purpose built in- process lab inspects every can that is processed through the plant. The commissioning of our blending and consumer packaging facility now offers our customers a complete supply chain solution from raw milk sourcing and collection through to retail packaging with minimal handling all at our Dunsandel site. LACTOFERRIN EXTRACTION AND PURIFICATION FACILITY Construction of our lactoferrin extraction and purification facility began in September 2013, with commercial production starting in April 2014. The project involved a significant upgrade to our specialty milks dryer (SMD), and the initial scope was expanded to deliver a pharmaceutical-grade facility in direct response to customer demand and market forecasts. The final capital cost was $21.9 million, up from the original budget of $15.1 million and the FY2014 interim revised budget of $19.2 million. Lactoferrin is a key ingredient in infant formula, nutritional and over the counter (OTC) products. Found naturally in human breast milk, it offers several health properties through a range of functions from iron binding ability to having antimicrobial, anti-inflammatory and antioxidant benefits. Our facility is one of two world-wide capable of producing spray-dried lactoferrin. We now have a process that enables command over the powder particle shape, density and morphology that results in improved dissolvability, coatability and protects its bio-activity. Coatability is a crucial component in the production of tablets, which form the backbone of the OTC market. Spray-dried lactoferrin contrasts with the more commonly freeze-dried and milled lactoferrin, which often contains particles that can be more difficult to dissolve, compress and coat. Currently, global demand for lactoferrin exceeds supply. We are targeting sales of 15 MT in FY2015. The global market for lactoferrin in 2012 was 185 MT, and this is projected to grow to 262 MT in 2017. We’re looking forward to working with our customers to apply further innovation in this high value nutraceutical ingredient. I PAGE 23 Synlait Milk Limited Annual Report 2014OUR PROCESS CONTINUED QUALITY UNDER THE MICROSCOPE Located on the ground floor of our new administration building, construction of our new quality testing laboratory begun in August 2014 and is due to be completed in June 2015. A dedicated team has spent the past year designing a technical centre of excellence to support our vision of becoming a trusted supplier of choice to the world’s leading milk-based health and nutrition companies. The centre will encompass a world class quality testing laboratory, product development laboratory, pilot scale plant, sensory analysis facility and finished product / raw material sampling facilities. Eurofins, a global leader in contracted laboratory services, have been engaged to incorporate leading edge technologies and best-in-class operating systems into our design. Over the past year, we’ve recruited several chemists, microbiologists and lab specialists to serve on the project team, and ultimately manage the laboratory on completion. We will work closely with International Accreditation New Zealand for independent, best-practice accreditation. This ensures the laboratory not only fulfils regulatory requirements, but meets the exacting standards our customers have come to know and expect from our products and processes. Additionally, the laboratory will also be certified to ISO 17025 standards, the globally recognised standard developed This investment will provide several benefits: specifically for testing laboratories. − Strengthened internal technical capabilities for food safety, quality, regulatory compliance and product / process development. − Appeal to leading scientists and food technologists. − Continue our high quality standards consistently and efficiently. − Greater control of the quality testing process. − Improved testing timeframes. − Faster product release to our customers. PAGE 24 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014I PAGE 25 Synlait Milk Limited Annual Report 2014OUR PEOPLE PAGE 26 I Synlait Milk Limited Annual Report 2014 Synlait Milk Limited Annual Report 2014OUR PEOPLE CREATING A LEADERSHIP CULTURE delivered in-house by Blue Mercury Leadership. Each person has completed a continuous improvement project within the business, and will present their results to the Senior We continue to invest in developing and growing our people, Leadership Team in October as part of the course. giving us great leaders at every level of our business. With the introduction of Blanchard’s Situational Leadership II SYNLAIT 101 (SLII) programme in 2013, we now have more than 50 people Introduced in 2013, our orientation programme for new staff leaders and emerging leaders fully trained in this cornerstone has been refined and formalised into a three day overview leadership model. Delivered internally by our own certified trainers, SLII provides a foundation for delivering on our four key leadership competencies: managerial, customers, personal leadership and leading others. All of our people leaders attended our first Leadership Conference in July 2014. Joined by three Board members, each person committed to undertaking one positive leadership action at work. These commitments range from working closer with colleagues and improved sharing of knowledge to improving the communication of our strategic plan and making changes to the way we hold meetings. taking place in the first week of starting at the Company. The programme is designed to help new staff be excited about their role and understand how different teams work as one to make more from milk. The programme gives a complete overview of the journey of milk from pasture to customer, it also introduces our safety culture, performance development system and leadership model helping to build a strong understanding of how the Company operates from day one. Presentations from various staff introduce different teams within the Company, from milk supply to marketing and energy management to plant operations. A clear focus is on staff being comfortable in their new environment. A site tour, warehouse tour and factory tour are given and a tanker trip to Guest speakers included Graeme Milne (Chairman, Synlait collect milk from several farms completes the programme. Milk Board of Directors), Sam Knowles (Director, Synlait Milk Board of Directors), Richard Smith (High Performance Leader, Crusaders Rugby Team) and Richard Searle (Mt Eliza Executive Education). We also support our current and emerging leaders with a range of professional development opportunities throughout the year, including scholarships for Outward Bound and higher education. Three staff are currently completing the Waikato Institute of Technology (WINTEC) Diploma in Dairy Processing. The qualification focuses on the science behind dairy processes, giving students a deeper understanding of the manufacturing process. A year into the qualification, they’re already applying newly acquired knowledge in their current roles. EVERYONE HOME SAFE EVERY DAY Our focus is on proactive engagement with our people to continually achieve high participation with our safety systems and processes. This begins with our new employee programme and continues with regular updates and monitoring. Safety the Synlait Way is our unique programme that will deliver on our health and safety strategy. It focuses on developing initiatives around the leadership, capability and engagement of our people, as well as implementing positive performance indicators through compliance with a business-wide safety management system. Nine staff will complete NZQA Certificate of Business (First You can read more about health and safety in Our Governance Line Leadership) course, which has been tailored to us and on page 34. I PAGE 27 Synlait Milk Limited Annual Report 2014OUR PEOPLE CONTINUED Jamie has recently taken on the role of shift leader, building on his four years’ of experience in our production plant. With responsibility for a shift of 12 staff and five process plants, he’s excited by the opportunities the Diploma will create for him. Once he has competed his course, he will be further qualified to oversee technical and quality aspects throughout the wider manufacturing process. Silvia Dominciano studied animal science in Brazil and brings several years of New Zealand dairy farming experience to her role as research officer in the Quality and Technical Services team. Silvia’s knowledge of dairy breeding and nutritional management from farming is useful on a daily basis. With the addition of dairy manufacturing knowledge from the Diploma, she contributes to the high-value products we produce via our specialty milks dryer (SMD). Vivian Chen6 brought three years of experience with the Chinese dairy industry to her role as sales support officer in May 2013. Joining us directly from Shanghai, Vivian is now a regional customer services manager for our customers in China and meticulously tracks their products throughout the manufacturing process. From assisting with canning production forecasting to monitoring quality grading and managing final logistics, she contributes significantly to the customer experience we’re proud of and known for. Vivian connects customers with our Dunsandel site on a daily basis, drawing on her personal knowledge of the China market to help customers like New Hope and Bright Dairy understand exactly what’s going on at every step of the way. Outside of work, Vivian has embraced the Kiwi culture and is known to give her colleagues a run for their money in our social touch rugby team. 1 2 3 4 GREAT PEOPLE We have a strong workplace culture and a big part of that is the diversity of expertise and experience amongst our people, which we encourage to maintain a dynamic and engaging environment. We employ approximately 238 people and we’d like to introduce you to a few. Liz Ireland1 and Stuart Nicholls2 joined us as University of Canterbury graduates in February 2014. Both hold a Masters of Engineering in Management, and undertook a specialist six- month project with us in 2013 to complete their study. Liz produced a feasibility report for our Quality and Technical Services team, looking at how buttermilk - a by-product of anhydrous milk fat (AMF) manufacture – might be used to produce a new value-added product. Stuart supported the Operations team to develop a production scheduling tool. The tool was designed to support staff focusing more on processing and less on scheduling, which is crucial during peak production periods. Stuart now works with our Business Planning and Optimisation team as a manufacturing and quality analyst. Liz is now a lactoferrin operator in our 5 Manufacturing team, having been a validation engineer since February 2014. Aaron Shaw3, Jamie Routhan4 and Silvia Dominciano5 were awarded scholarships to study for the New Zealand Diploma in Dairy Processing in 2013. Aaron has been with us for five years and is 6 a process leader. His leadership is already benefiting from his study with a better grasp of technical problem solving, helping his operating teams to maintain a high quality product throughout manufacturing. PAGE 28 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014OUR FUTURE In the initial public offering prospectus we outlined a series of growth initiatives that we had planned to undertake to expand our capacity and product offerings. We are now one year into the three year build programme and have made significant progress on these builds. This report outlines our current status on each of our significant projects. 1. Blending and Consuming Packaging 2. 22,500m² Drystore Construction of this plant is complete and it was The construction of the drystore was completed on time. commissioned in early July 2014. We have now received All inventories, previously held on site and across four other Ministry for Primary Industries approval of our Risk external locations were consolidated into our full on site Management Plan, and are therefore able to manufacture drystore facilities totalling approximately 35,000 m². As and export products from this plant. Due to enhancements noted in our Interim Report, the company decided to bring made to the original specification of the packaging line and forward the build of the drystore associated with our D3 associated plant, the annual capacity has been increased. project due to the considerable cost savings available by building all the additional drystore space at the same time. Status: Capacity: Completed 30,000 MT per annum Status: (original capacity 17,500 MT) Capacity: Total Cost: $29.2 million Completed 22,500 m2 (original capacity 12,500m2) (original budget $27.5 million) Total Cost: $17.0 million (original combined Commissioned: July 2014 budget $19.5 million) Commissioned: April 2014 I PAGE 29 Synlait Milk Limited Annual Report 2014OUR FUTURE CONTINUED 3. Lactoferrin Extraction and Purification Facility 5. Dryer 3 This facility was completed and commissioned on time The construction of our third large scale spray dryer is but ahead of previously advised budgets. The additional underway. This infant formula capable dryer is due to be capital cost reflected the increased scope of the design of commissioned in September 2015 in time for the start of the facility combined with the significant improvements the FY2016 milk season. The dryer contract was awarded made to the existing special milks dryer used to spray dry to Tetra Pak and the new 30 MT boiler was awarded to the lactoferrin product. In the period to year end 4 MT of RCR Energy. lactoferrin powder was manufactured, with 2 MT sold and delivered. We expect to sell 15 MT of lactoferrin in FY2015. Status: Capacity: Completed 23 MT per annum Total Cost: $21.9 million (revised FY2014 Status: Capacity: Construction started 10.5 MT per hour on whole milk powder equivalent (original capacity 8 MT per hour on whole milk powder equivalent) interim report budget $19.2 million, original budget $15.1 million) Commissioned: April 2014 Expected Total Cost: $135.0 million (original budget $103.5 million) Expected September 2015 Commissioning Date: (original date August 2015) 4. Quality Testing Laboratory and Administration 6. Ammix Butter Plant Building Construction of our quality testing laboratory and While planning for the build of a butter plant continues, it is now likely that the build of this facility will be deferred until administration building is underway as a combined facility. The quality testing laboratory includes new product development facilities and will lead to significantly reduced FY2016. Status: external quality testing costs over time. The administration Capacity: offices are being scoped to ensure capacity for future growth of the business and will allow the Company to continue to maintain our head office at our Dunsandel site. Status: Construction started Planning 7 MT per hour (25,000 MT per annum or 40,000 MT per annum with external cream source). Expected Total Cost: $15.0 million Expected TBC (original date May 2015) Expected Total Cost: $21.0 million Commissioning Date: (original budget $8.4 million) Expected June 2015 (revised interim 7. Tanker Fleet Yard Commissioning Date: report date February 2014, original date August 2014) Whilst not part of our major capital works, we have also undertaken the build of a tanker fleet yard and associated maintenance workshop for the fleet of milk tankers that are provided under contract with Hilton Haulage. This facility is expected to be completed in September 2014 at a cost of $1.8 million. PAGE 30 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014Environmental Loadout area Drystore 3 Proposed Cold store Proposed Forklift Corridor Proposed Walkway Packaging Proposed Packing 3 Office Extension and Laboratory Blending Dryer 3 Proposed Butter Lactoferrin Proposed Maintenance Store & Workshop Proposed Reception 2 Proposed Boiler 3 Proposed Security Control ON THE MAP THE AREAS IN DARKER BLUE ARE COMMENCED PROJECTS WITH THOSE IN LIGHTER BLUE STILL IN THE PLANNING. I PAGE 31 Synlait Milk Limited Annual Report 2014OUR REMUNERATION PAGE 32 I Synlait Milk Limited Annual Report 2014 Synlait Milk Limited Annual Report 2014OUR REMUNERATION CONTINUED We have an established Remuneration Policy. second is that certain annual compound growth targets in total Our aim is to attract, reward and retain staff with skills and shareholder returns (TSR) reaches the following set targets: capabilities to ensure the successful business outcomes by TSR providing a remuneration environment focused on productivity, performance and accountability. The Remuneration and Governance Committee oversees the operation of our Remuneration Policy, and monitors 20% or more 15% 12% the overall budgets for all employees. The Committee also Less than 12% Annual entitlement as a % of base salary 25% 18.75% 6.25% 0% recommends to the Board, for approval, the remuneration and bonus arrangements for our Senior Leadership Team and the Managing Director. Our Senior Leadership Team and our employees’ remuneration details (including the Managing Director’s) are set out in the ‘Statutory Information’ section. We also assess our Senior Leadership Team’s performance annually and director’s fees biennially (the last assessment was in 2013). We have the following share incentive plans in place for our staff: If all targets (including FY2014) were met, the total cost of the scheme would approximate $1.9m. The FY2014 targets were not met. − Staff Short Term Incentive Share Scheme: The targets were not met and the Scheme is therefore now expired. For further information about the scheme please refer to note 21 of the annual finanical statements. − Senior Employee IPO Incentive Scheme: This scheme provides an incentive to retain senior executive’s SHORT TERM INCENTIVE SCHEME post IPO for a period of 3 years, vesting a set number of We have a short term performance bonus scheme operating at Synlait shares in each of them depending on the number of various levels across our organisation. performance hurdles which have been met in each year. The maximum value opportunity per senior executive participating in the scheme is 75% of their base remuneration as at 1 August 2013. They can receive up to a maximum value of 25% of their base salary, by way of rights to shares valued at the IPO price, which will only vest at the end of the three year period, post IPO, on the condition that they are still employed at Synlait Milk and that the share price at that point is above the IPO price. For employees below Senior Leadership Team level the short term incentive opportunity ranges from 5% to 15% of the base remuneration and is based on a mixture of Company profit, team and individual objectives. At Senior Leader manager level the short term incentive opportunity ranges from 20% of based remuneration for direct reports to the Managing Director and 40% of base remuneration for the Managing Director. The staff, including Senior Leadership Team, short term incentive is awarded based on exceeding budgeted The performance hurdles are split into two separate Company NPAT (40%), and personal performance hurdles (60%). goals. The first is ensuring the Company over-performs on our budgeted net profit after tax (NPAT) by 10% or more, and the SUPERANNUATION We participate in Kiwi Saver, and pay the employer contribution of 3% to all employees participating in Kiwi Saver. I PAGE 33 Synlait Milk Limited Annual Report 2014OUR GOVERNANCE Our momentum continues to build due to our strong make ‘More from Milk,’ but also make more from ourselves, governance framework and continual focus on implementing efficiently and effectively managing Synlait Milk to deliver on effective policies that create excellence within the workplace. the results we all expect. You will already know that Synlait Milk Limited is a limited We are a non-standard Company in terms of NZX listing liability company under the Companies Act 1993, and that we requirements, with certain waivers from the NZX to this are listed on the Main Board of the NZX since 23 July 2013 effect. More details on the NZX waivers are detailed in our (see the code “SML” on www.nzx.com ). Statutory Information section (page 98), but generally the While we are a young public company, we are very fortunate waivers concern the appointment of our Directors. to have a track record of a very strong governance framework Our Board has up to eight Directors, and while our major before we were listed. In 2014 we have continued from this excellent foundation, and have made further improvements designed to ensure we are a professionally run organisation you can trust. shareholder Bright Dairy holds at least 37% of our shares, Bright Dairy may appoint up to four of those Directors - one of whom must be a New Zealand resident who is an experienced director. We are fortunate to have one of our long- serving Board members, the Honourable Ruth Richardson, to Some of our governance highlights for 2014 are: fulfil this role. − Extensive review and fine tuning of our Delegated We also must have a Managing Director who cannot be a Authorities Policy to better align the relevant levels and Bright Dairy Director (John Penno), and three independent ensuring any perceived risk areas are well covered. Directors (Sam Knowles, Graeme Milne and Bill Roest). Our − Development and adoption of an integrated Risk Management Framework. − Full external review of the performance of our Board, individual Directors and suggestions for improvements. − Full review and confirmation of our Strategic Plan - including a refresh of our 5 Year Plan and development independent Directors not only satisfy these requirements, but also bring considerable expertise and experience to the Board table. All our Directors are profiled on page 39 of this Annual Report. A third of our independent Directors will retire each year, and Bright Dairy may appoint their Directors as they wish (but one must always be a New Zealand resident, experienced of our 10 Year Strategic Plan. Director). We continue to be proud of what we have achieved to date, and the way our Company is managed. OUR BOARD Our Board is responsible for the overall corporate governance of Synlait Milk, including strategic direction, determination of policy, approval of significant contracts/projects, capital and operating budgets and overall stewardship of our In 2013 at our last Annual General Meeting (AGM), John Penno, Sam Knowles and Graeme Milne all retired and were re-elected unopposed to their Director position. At the Annual General Meeting, scheduled for December 2014, Bill Roest will be retiring in accordance with our Constitution but is standing for re-election. More details can be found in our Constitution, at the following link: www.synlait.com/site/uploads/2013/07/Synlait-Milk- organisation. Our Board is committed to ensuring we not only Limited-Constitution.pdf PAGE 34 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014OUR GOVERNANCE CONTINUED In 2014 we conducted a full review of the performance of our managed and governed at all times. Both committees meet at Board and all Directors. This was facilitated by an external least four times a year, but are also available at any stage to consultancy firm, who separately talked to each Director. consider any issue within their responsibility. The major findings from this review: We also have a standing committee appointed: − The Board is functioning to a high level in terms of − Disclosure Committee – chaired by the Managing “…efficiency, strong ethics, trust and thoroughness in Director (other members being the Chair of the Board and carrying out the process of Board meetings and conducting the Chief Financial Officer (CFO), with an alternate member business of the Board.” − The Board “…has developed clear protocols in its frequency of meetings, distribution of papers and managing the minutes and outcomes of Board meetings in order to govern the organisation and drive its performance.” Areas agreed for focus next year for the Board, are: being the Chair of Audit and Risk Committee). It monitors compliance by the Company and staff in relation to our Share Trading Policy and Guidelines, and ensures that all “material information” that is required to be disclosed to the market under the NZX Listing Rules is immediately disclosed. − An increased focus on in-depth workshop sessions for the POLICIES AND CHARTERS Board on more complex issues. − Continuing in-market visits and development of industry and customer engagement. − Assess the development opportunities for individual Directors. In 2013, a major new initiative was the completion of the integrated Risk Management Framework for the Company. This is a series of policies and plans which tie together the various risk management structures we already have in place in the Company, and then report those up through the Senior Leadership Team and ultimately to the Board. OUR BOARD COMMITTEES We have the following permanent Board committees: − Audit and Risk Committee – chaired by independent Director Bill Roest (other members – Dong Zongbo, Graeme Milne). It is charged with monitoring our internal control and risk management systems, financial reporting obligations, independent audit process and ensuring we comply at all times with all applicable laws, regulations, listing rules and our own company policies and procedures. − Remuneration and Governance Committee – chaired by Hon. Ruth Richardson (other members – Graeme Milne, Li Ke, Sam Knowles). It is charged with ensuring our commitment to health and safety, best practice employment and fair and proper remuneration is maintained at all times. The Committee is also responsible for ensuring all training and development, and proper governance structures are in place and being properly used at all levels of the Company. Both committees have Charters governing their operation, membership and remit to ensure that Synlait Milk is optimally The Framework consists of the: − Risk Management Policy: This sets out the high-level appetite of the Company for risk and identifies the major risk categories. It established the Board’s commitment to risk management. The Policy links all the underlying documents together (so provides the overall Risk Management Framework). − Risk Management Procedures & Guidelines: This is a more detailed document, that sets out how we identify and define what is a “risk” (as opposed to an “incident” or a “hazard”), sets the levels for the severity and likelihood of a risk occurring (producing a “risk assessment”), and introduces the capturing of risks in functional areas through the Risk Matrix. − Crisis Management Plan: Defines what is a “crisis”, and puts the practical operational procedures in place to manage that crisis event should it ever occur. − Incident Management Plan: Defines what is an “incident” and puts the operational procedures in place to manage an incident. I PAGE 35 Synlait Milk Limited Annual Report 2014OUR GOVERNANCE CONTINUED We have also successfully conducted three dry-run trials of − Treasury Management Policy: Is our internal policy for our Crisis Management Plan, involving various levels of the managing our foreign exchange, debt, interest rates and Company in hypothetical scenarios. related financial activities. This is actively managed, and Our development of a sustainability and environmental policy forms part of our essential internal controls. is still a work in progress, but we have made significant − Sales Policy: This sets out our internal commercial progress. The environment plan template within our “Lead position with respect to our sales of products to customers, With PrideTM programme was approved by Environment in terms of pricing, volumes, reporting and forecasting. Canterbury as the first farm environment plan template under the proposed Land & Water Regional Plan. We are also are currently going through a revised District Plan process. − Continuous Disclosure Policy: This ensures we immediately inform the market of any material information, and have in place proper management processes to ensure Also in 2014 we continued with the implementation of the this is a discipline throughout the whole organisation. Sustainable Dairying: Water Accord. This is dealt with in more The Disclosure Committee is responsible for monitoring detail in the Our Place section of this Annual Report (page 20). compliance with this policy. In addition, in accordance with recognised best practice − Securities Trading Policy and Guidelines: This is to governance, we have in place the following essential corporate ensure all our staff and Directors appreciate the special role governance documents (amongst others): they hold, and ensure they operate ethically and properly − Board Charter: This guides our Board in terms of objectives and rules to make sure we always follow our Constitution, statutory duties and other corporate obligations. − Board Code of Ethics: This sets the moral compass for our Directors in all Synlait Milk matters – ensuring professionalism, ethical conduct and best practice is maintained at the Board table and beyond by all our in relation to any personal activity. This includes express “black-out” periods for special classes of our staff with in-depth financial and Company knowledge. It also has a detailed reporting regime to ensure compliance. − Directors’ Conflict of Interest Policy: This ensures all our Directors appreciate and know how to manage and mitigate any impact on our Synlait Milk operations relative to their own personal affairs. Directors. An important part of the Code is the use of − Related Transaction Policy: This ensures any major Company information by Directors, which safeguards shareholders are treated purely on an arms-length basis, Company confidential information. and in the best interests of Synlait at all times. − Audit and Risk Committee Charter and Remuneration − Delegated Authorities Policy: This is the operational and Governance Committee Charter: For each guide for our Board and all staff in the day-to-day Committee, its Charter sets out the objectives, authorities, operations of Synlait Milk, ensuring a proper degree of roles and responsibilities and operational rules for the accountability and control is maintained at all times, and respective members to ensure they deliver on their allowing risk to be properly apportioned and managed. governance requirements. PAGE 36 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014OUR GOVERNANCE CONTINUED − Employee Handbook: Apart from the operational HEALTH AND SAFETY aspects of working at Synlait Milk, this Handbook has the professional obligations and ethics expected of all staff, and also a protected disclosures regime (whistle- blowers provisions) – ensuring any major problems can be immediately brought to Senior Leadership Team or the Board’s attention without fear of any negative reaction. We appreciate that the success of our business depends on our excellent staff, and so their wellbeing is of vital importance to us. Accordingly, we have a continuing commitment to health, safety and wellness at Synlait Milk. Our vision is: Everyone home safe every day. All the above Policies, Charters and Codes are to be reviewed Our objectives are: at least annually by the Board or applicable Board Committee to ensure they continue to deliver the optimal structure for - Zero exposure to uncontrolled risks. governing our Company going forward. - Fatal (critical) risk focus. We have many other internal policies and procedures to - Zero injury accidents. ensure we are an efficiently and effectively run organisation. - Healthy and well, living life in balance. For more information on our publicly available Policies and Charters, please visit our investor relations section on our website at www.synlait.com/investors/corporate- governance/. The Directors’ disclosures of interest are set out in Statutory Information section (page 96). OUR OPERATIONS We are developing a fully integrated approach to health and safety matters – maintaining our present focus of strong operational systems and procedures, and continuing our emphasis on rehabilitation in the event of injury or incident. Over the next three years we have committed, as an organisation, to migrate our present workplace safety management practices approach into a wider Synlait Milk safety management system. This will be achieved through a All of our Board members have access to all relevant Synlait comprehensive review of all health, safety and wellness risks Milk information, and are fully briefed before each Board using the “Bow Tie” risks and control measures assessment meeting. They are provided with minutes of past meetings, approach, and by us implementing a new system to capture and have available the Synlait Milk Company Secretary and risks, hazards and incidents. Synlait Milk management to answer any questions or to respond to any issues at any time. Included in our safety initiatives is a review of our safety on-boarding processes and information, rollout training in Our Board has determined we are in compliance with all NZX ICAM root cause investigation methodology (Incident, Cause, Listing Rules and applicable legal requirements. Analysis, Method), review of our employee participation systems and a move to a focus on measuring total recordable injury frequency rate (TRIFR). We will report on our TRIFR achievement in our next Annual Report. I PAGE 37 Synlait Milk Limited Annual Report 2014 BOARD OF DIRECTORS LEFT TO RIGHT; BILL ROEST, SIHANG YANG, RUTH RICHARDSON, GRAEME MILNE, KE LI, JOHN PENNO, ZONGBO DONG SAM KNOWLES PAGE 38 I The Board of Directors in the recently completed drystore. For Health and Safety Purposes containerisation was not operational during this photo-shoot. Willem (Bill) Jan Roest NON-EXECUTIVE DIRECTOR (INDEPENDENT), CHAIR OF THE AUDIT AND RISK COMMITTEE Bill was appointed to the Synlait Milk Board in May 2013. He is a director of Synlait Milk Limited and Synlait Milk Finance Limited. Bill’s long and varied career included 12 years as Chief Financial Officer of Fletcher Building Limited until April 2013. He has held several leadership roles in New Zealand’s corporate sector, including Managing Director of Fletcher Residential and Fletcher Aluminium. Bill is also a director of Housing Foundation Limited, Metro Performance Glass and Fisher and Paykel Appliances Holdings Limited, where he chairs the Audit Committee. Bill is a member of the Institute of Directors, Chartered Accountants Australia and New Zealand and an Association of Chartered Certified Accountants (UK) fellow. Sihang Yang BRIGHT DAIRY APPOINTED DIRECTOR Yang was appointed a director of Synlait Milk in August 2010. With 15 years of industry experience, he is Bright Dairy & Food Co.’s director of strategy and research and director of several Bright Dairy subsidiaries. Yang previously worked for Heilongjiang Dairy Group as the director of technology and subsequently as the director of quality assurance. He was later appointed the secretary-general of Heilongjiang Dairy Industry Association and a director of China Dairy Industry Association. Yang is currently a director of Synlait Milk Limited, Synlait Milk Finance Limited and Zhejiang Hai Hua Dairy Co., Ltd. He holds a master’s degree in food science and engineering. Hon. Ruth Margaret Richardson NON-EXECUTIVE DIRECTOR, CHAIR OF REMUNERATION AND GOVERNANCE COMMITTEE A professional company director, Ruth specialises in agribusiness, commercialising innovation, information technology and finance. Ruth joined the Synlait Group as the first independent director in 2004. BOARD OF DIRECTORS Ruth was the Member of Parliament for Selwyn (Synlait Milk’s base) from 1981 – 1984 and later New Zealand’s Minister of Finance from 1990 to 1993. Following her political career, Ruth established herself as a public policy consultant and accepted a range of corporate governance roles. Ruth is currently Chairman of Jade Software Corporation Limited, SYFT Technologies Limited, Kiwi Innovation Network Limited (Kiwinet), The New Zealand Merino Company and the Kula Fund Advisory. She is a director of Synlait Milk Limited, Synlait Milk Finance Limited. Previous governance roles include Dairy Brands, the Reserve Bank of New Zealand and Wrightson Limited. Ruth holds a Bachelor of Laws (with honours) from the University of Canterbury. Graeme Roderick Milne CHAIRMAN (INDEPENDENT) Graeme joined the Synlait Group as a director in 2006. With extensive experience, his career in the dairy industry has seen him working in New Zealand, Australia and Europe. He is the Chairman of Synlait Milk Limited and Synlait Milk Finance Limited. Graeme was appointed CEO of Bay Milk Products in 1992, and has held several leadership roles since then. This included CEO of the New Zealand Dairy Group prior to the formation of Fonterra and interim CEO of Richmond Limited and Bonlac Limited in Australia. Now a farmer, Graeme maintains several governance roles with a range of organisations. He is the chairman of the Terracare Fertilisers Limited, New Zealand Pharmaceuticals Limited and Johnes Disease Research Limited. Graeme is also a director of Genesis Energy Limited, FMG and Alliance Group Limited. Ke Li BRIGHT DAIRY APPOINTED DIRECTOR Li was appointed a director of Synlait Milk in August 2010. Li is currently a director of Synlait Milk Limited and Synlait Milk Finance Limited. Li has worked for Bright Dairy for over 12 years. During her years at Bright Dairy, Li’s sales and marketing expertise has helped the significant growth of many different Bright Dairy brands, including the Bright brand. Li leads the team tasked with promoting Pure CanterburyTM infant formula products in China, which has achieved remarkable growth in the last few years. A vice president of Bright Dairy & Food Co., Ltd and head of marketing, Li also heads Bright Dairy’s public relations department. She is a director of a number of Bright Dairy subsidiaries. Li holds a Master of Business Administration from La Trobe University, Melbourne. John William Penno MANAGING DIRECTOR (NON-INDEPENDENT) John co-founded the Synlait Group in 2000 and has been a full-time executive for the Synlait Group for the last 11 years. With the appointment of Graeme Milne as an independent chairman of Synlait Limited in 2006, John stood down from his initial role as executive chair to focus on the Managing Director role. After completing an Agricultural Science degree, John commenced his career in the dairy industry as a consulting officer for the New Zealand Dairy Board before joining Dexcel as a research scientist where he completed a PhD in animal science. As a scientist and research program leader he worked to enable New Zealand dairy farmers to increase productivity and profit. In 2000, John was appointed General Manager of the NZ National Dairy Industry Extension Program, which serviced farm owners, workers and rural professionals. John was appointed as Managing Director of Synlait Milk on 21 June 2013. John is also currently a director of Synlait Milk Finance Limited, Synlait Farms Limited (which is a supplier of raw milk to Synlait Milk) and Synlait Farms Finance Limited. In the past five years John has also been a director of Dairy Insight, Axe Brasil Limited, Synlait Limited and a number of companies associated with the Synlait Group and / or dairy farms. John was the inaugural Chairman of the Dairying and Environment Leadership Group. John is a member of the New Zealand China Council Advisory Board. In 2009, John received an emerging leader’s award from the Sir Peter Blake Trust and was also awarded the Federated Farmers inaugural agribusiness person of the year. Zongbo Dong BRIGHT DAIRY APPOINTED DIRECTOR Dong was appointed a director of Synlait Milk in August 2010. Currently he is a director of Synlait Milk Limited and Synlait Milk Finance Limited. Since 1985, Dong has worked in accounting and finance roles for the dairy industry. Dong was appointed vice general manager and CFO of Shanghai Danone Yogurt and Cheese Co., Ltd. in the 1990s. He oversaw 16 Bright Group subsidiaries merge into the Bright Dairy & Food Co., Ltd. structure. He became CFO for Bright Dairy & Food Co., Ltd in 2007. Dong is currently a director and supervisor for a number of Bright Dairy subsidiaries, is a member of the Institute of Public Accountants (Australia) and has certification granted by China Association of Chief Financial Officers. Sam Knowles NON-EXECUTIVE DIRECTOR (INDEPENDENT) Sam has held senior executive positions in major banks in both Australia and New Zealand, and is currently a director of Synlait Milk Limited and Synlait Milk Finance Limited. He has extensive experience in private and public sector governance, with more than 12 years on several boards of NZX listed companies, including as Chairman of Xero. He had a key role in establishing Kiwibank, leading the company from being a start-up to a large successful business. Sam’s governance roles focus on growth businesses. He is Chairman of Partners Life, OnBrand Partners and Umajin Limited. Sam is also a director of TrustPower, SLI Systems, Magritek and Rangatira. I PAGE 39 SENIOR LEADERSHIP TEAM FROM LEFT TO RIGHT; MICHAEL STEIN NEIL BETTERIDGE NATALIE LOMBE JOHN PENNO MIKE LEE NIGEL GREENWOOD MATTHEW FOSTER PAGE 40 I The Senior Leadership Team in the recently completed containerisation yard. For Health and Safety Purposes containerisation was not operational during this photo-shoot. SENIOR LEADERSHIP TEAM Michael Stein GENERAL MANAGER QUALITY AND TECHNICAL SERVICES Michael Stein joined Synlait Milk in June 2013 and is responsible for providing strategic leadership for quality across the Synlait Milk business. Michael leads a team of quality assurance, technical and other professionals with the objective of ensuring that Synlait Milk continuously improves its quality systems to deliver safe, high quality dairy ingredients and nutritional products that meet our customer’s expectations and regulatory requirements in the markets we serve. Michael brings to Synlait Milk over 20 years of global quality management experience in the infant formula, nutritional products and medical foods business. His most recent role was Director of Quality for Mead Johnson Nutrition, Asia-Pacific where he led quality and technical teams at business units and manufacturing sites across China, South East Asia, Oceania and the Middle East. During his career, Michael also held quality, food safety and laboratory leadership roles with Nestle Nutrition, Nestle USA and Nutricia, Inc. Michael earned his Bachelor of Science degree in Microbiology from the Ohio State University. Neil Betteridge GENERAL MANAGER MANUFACTURING Neil joined Synlait Milk in 2007 after 10 years with Fonterra. Neil currently leads a manufacturing team of more than 120 people and is responsible for the execution of sound manufacturing processes across the entire Synlait Milk plant. He also leads the development of our Infant Formula and Nutritional product manufacturing capabilities. Neil has been involved with the design and construction of the various phases of the Synlait Milk site. Since completing a Bachelor of Chemical & Process Engineering with honours from the University of Canterbury and a Post Graduate Diploma in Dairy Science & Technology, Neil’s career has included working with manufacturing processes for a variety of dairy products. Neil is a member of the New Zealand Institute of Food Science and Technology and a Chartered Professional Engineer. Natalie Lombe GENERAL MANAGER CULTURE, CAPABILITY AND STRATEGY Natalie joined Synlait Milk in January 2011 and is responsible for leading initiatives to develop fully enabled and engaged staff as well as facilitation of strategic planning process. Natalie also oversees the human resource, payroll and health and safety functions. Prior to joining Synlait Milk, Natalie held senior human resource positions with Christchurch International Airport, Goodman Fielder, Mainland Products and Allied Telesys, together with extensive human resource and change management experience working in a number of fast moving consumer goods industries in Australia. Natalie holds a Post Graduate Diploma in Dispute Resolution and a Bachelor of Business majoring in human resources and industrial relations, and is a member of the Human Resources Institute of New Zealand. John Penno CHIEF EXECUTIVE OFFICER AND MANAGING DIRECTOR John co-founded the Synlait Group in 2000 and has been a full-time executive for the Synlait Group for the last 11 years. With the appointment of Graeme Milne as an independent chairman of Synlait Limited in 2006, John stood down from his initial role as executive chair to focus on the Managing Director role. After completing an Agricultural Science degree, John commenced his career in the dairy industry as a consulting officer for the New Zealand Dairy Board before joining Dexcel as a research scientist where he completed a PhD in animal science. As a scientist and research program leader he worked to enable New Zealand dairy farmers to increase productivity and profit. In 2000, John was appointed General Manager of the NZ National Dairy Industry Extension Program, which serviced farm owners, workers and rural professionals. John was appointed as Managing Director of Synlait Milk on 21 June 2013. John is also currently a director of Synlait Milk Finance Limited, Synlait Farms Limited (which is a supplier of raw milk to Synlait Milk) and Synlait Farms Finance Limited. In the past five years John has also been a director of Dairy Insight, Axe Brasil Limited, Synlait Limited and a number of companies associated with the Synlait Group and / or dairy farms. John was the inaugural Chairman of the Dairying and Environment Leadership Group. John is a member of the New Zealand China Council Advisory Board. In 2009, John received an emerging leader’s award from the Sir Peter Blake Trust and was also awarded the Federated Farmers inaugural agribusiness person of the year. Mike Lee GENERAL MANAGER SALES Mike joined Synlait Milk in September 2011 and leads sales, business development and overall category profitability. Mike worked for Fonterra and the NZ Dairy Board for 14 years in sales, marketing and business development roles in the international ingredient business, including working for 10 years in Europe, Asia and Australia. Mike has worked extensively with both commodity and added value ingredients. Mike worked for seven years in two research and innovation organisations involved in environmental research and biomaterials, leading the business and technology commercialisation functions including various start- up and growth businesses. Mike has a degree in Food Technology and a Diploma in Business and is really enjoying his return to the international dairy industry. Nigel Greenwood CHIEF FINANCIAL OFFICER Nigel has had extensive experience in finance, having held senior executive finance roles with various New Zealand companies. As CFO, Nigel is responsible for finance, funding, legal, information technology and strategy. Prior to joining Synlait Milk in April 2010, Nigel held CFO roles with Crane Distribution NZ Limited, Gough Group Limited and Lyttelton Port Company Limited. Nigel is a member of the Chartered Accountants Australia and New Zealand and the Institute of Directors. Nigel has a Bachelor of Commerce (majoring in accounting) and has completed the General Manager Program at the University of Michigan. Matthew Foster GENERAL MANAGER SUPPLY CHAIN Matthew joined Synlait Milk in February 2012 and is responsible for managing and developing Synlait Milk’s supply chain activities from farmer to customer. He brings a wealth of supply chain management and dairy industry experience to Synlait Milk after a 20 year career with the New Zealand Dairy Board and Fonterra where he held senior management positions in the United Kingdom, Australia, Japan, the Americas and New Zealand. Before joining Synlait Milk, Matthew was CEO at NZL Group and prior to that General Manager Commercial for Tasman Orient Line. Matthew is a member of the Chartered Accountants Australia and New Zealand and holds a Bachelor of Management Studies from the University of Waikato. I PAGE 41 OUR FINANCIAL REVIEW Nigel Greenwood CHIEF FINANCIAL OFFICER PAGE 42 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014OUR FINANCIAL REVIEW CONTINUED Our revenue for FY2014 of $601 million increased 43.0% on We have estimated our product sales phasing financial cost our FY2013 result of $420 million, primarily driven by higher at $6.5 million caused by the rapid decline in international international commodity prices that prevailed for most the commodity prices during the last five months of FY2014. In year. The average US dollar commodity price in FY2014 was addition, we have estimated that our annual average NZ USD $4,650 compared with USD $3,460 in FY2013. Total dollar to US dollar exchange rate for FY2014, at 0.813 cents, volume shipped for FY2014 was 93,644 MT, an increase of is expected to be higher than that applied in the calculation 8.0% on our FY2013 result of 86,746 MT shipped. of the farm gate milk price resulting in an estimated cost of Ingredient sales volumes in FY2014 at 87,248 MT was 7.6% ahead of our FY2013 result of 81,085 MT. Infant and nutritional sales volumes in FY2014 at 6,396 MT were only slightly ahead of 5,661 MT in FY2013 and well below our prospective financial information (PFI) volumes of 11,684 MT. As noted in the Managing Directors capital report our sales of infant formula products were significantly impacted by the regulatory changes in China that were implemented during the course of FY2014. Our gross profit for FY2014 at $77.1 million increased 18.4% on our FY2013 result of $65.1 million and was in line with our PFI of $76.4 million. However, this result was primarily achieved via a one off product mix benefit estimated to be $24.5 million. There were a number of significant costs incurred during FY2014 that impacted on our gross margin performance in $4.1 million. The cost of milk purchased remains our most significant cost when determining gross profit. Our final base milk price for FY2014 is $8.27 per kgMS, significantly higher than our FY2013 base milk price of $5.81 per kgMS. In addition, we paid $0.04 per kgMS in seasonal and value added premiums to increase the average total milk price to $8.31 per kgMS compared with $5.89 per kgMS in FY2013. EBITDA at $43.8 million increased 13.8% on FY2013 result of $38.5 million and was in line with our PFI of $44.0 million. Overheads, including depreciation, at $44.7 million had increased $6.3 million on our FY2013 result of $38.4 million, mainly due to the increased investment in staff during FY2014. However, these costs were in line with our PFI at $44.4 million. comparison to our PFI gross margin. The main impacts were Net finance costs at $5.3 million in FY2014 are well down on as follows: − The anticipated margin on infant formula sales not achieved. $8.3 million. − Stock provisions and write offs on infant formula inventories. $7.5 million. − Product sales phasing estimated costs. $6.5 million. − Foreign exchange impact. $4.1 million. our FY2013 costs of $12.3 million, primarily due to the benefit of the net initial public offering (IPO) proceeds of $68.9 million received late July 2013 being applied against our term debt. The net finance costs are ahead of our PFI of $4.8 million due to higher working capital interest costs driven by the higher inventory and receivables values as a result of the very high commodity prices prevailing during FY2014. Our FY2014 NPAT at $19.6 million increased 70% on our FY2013 result of $11.5 million and slightly behind of our The lower infant formula margin together with the associated PFI of $19.7 million. infant formula provisions and write-offs totalling $15.8 million primarily relate to manufactured infant formula inventories that were unable to be sold into the China market as a result of the Regulatory changes. Some of these inventories have expired and have since been sold as stock food, while the remainder have been provided to estimated net realisable values in order to sell this product. This resulted in basic and diluted earnings per share (EPS) of 13.40 cents in FY2014 against 10.21 cents in FY2013. It also generated a pre-tax return on average capital employed of 11.5% in FY2014 compared with 13.1% in FY2013. I PAGE 43 Synlait Milk Limited Annual Report 2014OUR FINANCIAL REVIEW CONTINUED FINANCIAL POSITION Due to the growth in retained earnings our total shareholders funds increased to $183 million in FY2014, an increase of 11.6% over FY2013 balance at $164 million. However, our shareholders funds to total tangible assets dropped from 47.4% in FY2013 to 38.4% in FY2014 driven by the growth in both current and fixed assets. Total shareholders funds were in line with our PFI at $185 million. Total tangible assets in FY2014 were at $472 million an increase of 38% over $342 million in FY2013 and were also above our PFI of $380 million. Current assets in FY2014 were up $43 million when compared to FY2013 and $75 Further information on our growth initiative projects are set out earlier in the report on pages 29 to 31. CASH FLOW Cash flow from FY2014 operating activities of $59 million reflects a forecast reversal from FY2013 cash outflows of $47 million. However, our result was $23 million below the PFI primarily due to higher working capital balances for receivables and inventory at year end. The cash investment in our capital projects at $96 million primarily reflected the build of our growth initiative projects during FY2014 and was above our PFI of $69 million for the million higher than PFI. The primary cause of this was both reasons already noted earlier in this report. Net cash inflows from financing activities in FY2014 at $39 million had decreased by $17 million on our FY2013 result of $56 million this was primarily due to the net impact of increased borrowings of $80 million, associated with our investment in capital growth initiative projects during FY2014, offset by the net proceeds from the IPO of $69 million in FY2013. Our net debt position at the end of FY2014 was $152 million, $46 million higher than the $106 million in FY2013 and $65 million higher than our PFI of $87 million. The causes of these increases over both FY2013 and our PFI have been addressed earlier in this report. Nigel Greenwood CHIEF FINANCIAL OFFICER receivables and inventory values had increased due to higher commodity prices than in FY2013 and from our PFI. This drove high receivables and inventory values for FY2014. Our investment in fixed assets have increased to the build of our new drystore, lactoferrin extraction and purification facility and blending and consumer packaging plant as well as the initial costs associated with the build of dryer three. Total liabilities for FY2014 grew to $294 million an increase of 61% over $182 million in FY2013 and well above our PFI of $195 million. A significant cause of this increase was the level of trade and other payables which at $117 million were well above our FY2013 balance at $58 million and the PFI at $87 million. This was due to the higher than anticipated milk price in FY2014 increasing the milk supplier liability at year end. Loans and borrowings at $91 million had also increased on our FY2013 position at $28 million and the PFI at $47 million. While term debt in FY2014 was expected to increase due to our investment in our growth initiative projects, the amount is $44 million more than PFI due to a number of reasons: − A decision to bring forward the build of drystore three. $5.2 million. − Increased spend on the lactoferrin extraction and purification facility. $6.8 million. − Earlier than anticipated costs associated with the build of dryer three. $17.7 million. − Deferment of voluntary repayment on the revolver facility until FY2015. $18.8 million. PAGE 44 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014I PAGE 45 Synlait Milk Limited Annual Report 2014OUR FINANCIAL STATEMENTS OUR MOMENTUM IN DOLLARS AND CENTS PAGE 46 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014SYNLAIT MILK LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014 CONTENTS Directors’ Responsibility Statement Financial Statements Statement of Comprehensive Income Statement of Changes in Equity Statement of Financial Position Statement of Cash Flows Notes to the Financial Statements 1 Reporting entity 2 Basis of preparation 3 Summary of significant accounting policies 4 Critical accounting estimates and judgements 5 Segment information 6 Revenue 7 Expenses 8 Finance income and expenses 9 Income tax 10 Current assets - Cash and cash equivalents 11 Current assets - Trade and other receivables 12 Current assets - Inventories 13 Non-current assets - Other financial assets 14 Non-current assets - Property, plant and equipment 15 Non-current assets - Intangible assets 16 Trade and other payables 17 Advances from subsidiary 18 Loans and borrowings 19 Deferred tax assets and liabilities 20 Share capital 21 Share-based payments 22 Reserves and retained earnings 23 Reconciliation of profit after income tax to net cash inflow from operating activities 24 Financial risk management 25 Financial instruments 26 Contingencies 27 Commitments 28 Related party transactions 29 Investments in subsidiaries 30 Comparison of prospective financial information 31 Events occurring after the reporting period Auditor’s Report PAGE 48 49 50 52 53 54 54 54 55 62 63 62 63 64 64 66 66 67 67 68 70 70 71 71 72 73 74 76 77 78 83 86 86 87 89 89 93 94 I PAGE 47 Synlait Milk Limited Financial Statements for the year ended 31 July 2014DIRECTORS’ DECLARATION AS AT 31 JULY 2014 DIRECTORS’ RESPONSIBILITY STATEMENT The Directors are pleased to present the financial statements for Synlait Milk Limited and its subsidiary set out on pages 49 to 93 for the year ended 31 July 2014. The Directors are responsible for ensuring that the financial statements give a true and fair view of the financial position of Synlait Milk Limited and its subsidiary (together ‘the Group’) as at 31 July 2014 and the financial performance and cash flows for the year ended on that date. The Directors consider that the financial statements of the Group have been prepared using appropriate accounting policies, consistently applied and supported by reasonable judgements and estimates and that all relevant financial reporting and accounting standards have been followed. The Directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the determination of the financial position of the Group and facilitate compliance of the financial statements with the Financial Reporting Act 1993. For and on behalf of the Board. Graeme Milne CHAIRMAN 19 September 2014 John Penno MANAGING DIRECTOR 19 September 2014 PAGE 48 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 JULY 2014 Group Year ended 2014 $’000 Notes Parent Year ended 2013 $’000 2014 $’000 2013 $’000 6 7 6 7 7 8 8 8 9 9 Revenue Cost of sales Gross profit Other income Sales and distribution expenses Administrative and operating expenses Earnings before net finance expense and income tax Finance expenses Finance income Net finance costs Profit before income tax Income tax expense Net profit after tax for the year Other comprehensive income Items that may be reclassified subsequently to profit and loss Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total items that may be reclassified subsequently to profit and loss Other comprehensive income for the year, net of tax Total comprehensive income for the year Earnings per Share 600,518 420,010 600,518 420,010 (523,430) (354,862) (523,430) (354,862) 77,088 65 (27,760) (16,954) 32,439 (6,516) 1,172 (5,344) 27,095 (7,492) 19,603 65,148 1,587 (26,541) (11,915) 28,279 (13,525) 1,272 (12,253) 16,026 (4,498) 11,528 77,088 65 (27,760) (16,954) 32,439 (6,516) 1,172 (5,344) 27,095 (7,492) 19,603 65,148 1,587 (26,541) (11,915) 28,279 (13,525) 1,272 (12,253) 16,026 (4,498) 11,528 1,875 (3,387) 994 (1,633) (2,249) 104 (270) (270) 19,333 (337) 1,043 (2,681) (2,681) 8,847 (1,208) 60 (154) (154) 19,449 (1,386) 845 (2,174) (2,174) 9,354 Basic and diluted earnings per share (cents) 20 13.40 10.21 13.40 10.21 The accompanying notes form part of and are to be read in conjunction with these financial statements. I PAGE 49 Synlait Milk Limited Financial Statements for the year ended 31 July 2014STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JULY 2014 Share Capital Employee Benefits Reserve Hedging reserves Revaluation reserve Retained earnings Notes $’000 $’000 $’000 Group Equity as at 1 August 2012 Profit or loss for the year Other comprehensive income Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total other comprehensive income Issue of new shares Share issue costs Total contributions by and distributions to owners Equity as at 31 July 2013 Profit or loss for the year Other comprehensive income Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total other comprehensive income Issue of new shares Share issue costs Employee benefits reserve 20 20 21 Total contributions by and distributions to owners Equity as at 31 July 2014 103,648 - - - - - 20 20 75,000 (6,100) 68,900 172,548 - - - - - - (301) - (301) 172,247 848 - (3,387) (337) 1,043 (2,681) - - - $’000 8,008 - - - - - - - - $’000 (26,213) 11,528 - - - - - - - Total equity $’000 86,291 11,528 (3,387) (337) 1,043 (2,681) 75,000 (6,100) 68,900 (1,833) 8,008 (14,685) 164,038 - 1,875 (2,249) 104 (270) - - - - - - - - - - - - - 19,603 19,603 - - - - - - - - 1,875 (2,249) 104 (270) - (301) 60 (241) (2,103) 8,008 4,918 183,130 - - - - - - - - - - - - - - - - - 60 60 60 The accompanying notes form part of and are to be read in conjunction with these financial statements. PAGE 50 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JULY 2014 Parent Equity as at 1 August 2012 Profit or loss for the year Other comprehensive income Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total other comprehensive income Issue of new shares Share issue costs Total contributions by and distributions to owners Equity as at 31 July 2013 Profit or loss for the year Other comprehensive income Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total other comprehensive income Share issue costs Employee benefits reserve Total contributions by and distributions to owners Equity as at 31 July 2014 Share Capital Employee Benefits Reserve Hedging reserves Revaluation reserve Retained earnings Total equity Notes $’000 $’000 $’000 103,648 - - - - - 20 20 75,000 (6,100) 68,900 172,548 - - - - - 20 21 (301) - (301) 172,247 - - - - - - - - - - - - - - - - 60 60 60 848 - (1,633) (1,386) 845 (2,174) - - - $’000 8,008 - - - - - - - - $’000 $’000 (26,213) 11,528 86,291 11,528 - - - - - - - (1,633) (1,386) 845 (2,174) 75,000 (6,100) 68,900 (1,326) 8,008 (14,685) 164,545 - 994 (1,208) 60 (154) - - - - - - - - - - - 19,603 19,603 - - - - - - - 994 (1,208) 60 (154) (301) 60 (241) (1,480) 8,008 4,918 183,753 The accompanying notes form part of and are to be read in conjunction with these financial statements. I PAGE 51 Synlait Milk Limited Financial Statements for the year ended 31 July 2014STATEMENT OF FINANCIAL POSITION AS AT 31 JULY 2014 Current assets Cash and cash equivalents Trade and other receivables Goods and services tax refundable Income accruals and prepayments Inventories Derivative financial instruments Total current assets Non-current assets Property, plant and equipment Intangible assets Investments in subsidiary Other investments Derivative financial instruments Total non-current assets Total assets Current liabilities Working capital facility Trade and other payables Current tax liabilities Trade finance facility Advances from subsidiary Derivative financial instruments Total current liabilities Non-current liabilities Loans and borrowings Deferred tax liabilities Derivative financial instruments Advances from subsidiary Total non-current liabilities Total liabilities Equity Share capital Reserves Retained earnings/(deficit) Total equity attributable to equity holders of the Company Total equity and liabilities Notes 10 11 12 25 14 15 29 13 25 18 16 18 17 25 18 19 25 17 20 22 Group 2014 $’000 2,393 89,046 8,880 786 71,262 1,632 2013 $’000 2,365 59,134 2,917 570 65,025 1,138 Parent 2014 $’000 2,393 89,046 8,880 786 71,262 1,595 2013 $’000 31,487 59,134 2,917 570 65,025 1,138 173,999 131,149 173,962 160,271 298,186 210,780 298,186 4,589 4,052 4,589 210,780 4,052 - 70 42 302,887 476,886 12,500 116,730 2,618 50,613 - 2,916 - - 86 1 70 - 1 - - 214,918 346,067 302,846 476,808 214,833 375,104 33,079 57,535 - 46,924 - 4,379 - - 116,007 57,421 2,618 50,613 13,660 2,443 - 46,924 63,926 2,980 185,377 141,917 185,341 171,251 - - 16,767 11,953 91,376 16,525 478 - 108,379 293,756 27,917 11,755 440 - 40,112 182,029 - 90,947 107,714 293,055 172,247 172,548 172,247 5,965 4,918 183,130 476,886 6,175 (14,685) 164,038 346,067 6,588 4,918 183,753 476,808 - 27,355 39,308 210,559 172,548 6,682 (14,685) 164,545 375,104 The accompanying notes form part of and are to be read in conjunction with these financial statements. PAGE 52 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 JULY 2014 Cash flows from operating activities Cash receipts from customers Cash paid for milk purchased Group Year ended Parent Year ended Notes 2014 $’000 2013 $’000 2014 $’000 2013 $’000 568,266 382,600 569,307 381,552 (362,551) (289,268) (362,551) (289,268) Cash paid to other creditors and employees (141,077) (141,231) (141,686) (141,345) Goods and services tax refunds / (payments) Income tax refunds (5,963) - 575 229 (5,963) - 575 229 Net cash inflow / (outflow) from operating activities 23 58,675 (47,095) 59,107 (48,257) Cash flows from investing activities Interest received Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Acquisition of intangible assets Purchases of available-for-sale financial assets 130 (95,876) 133 1,272 (6,437) - 130 (95,876) 133 (1,508) (1,607) (1,508) (70) - (70) 1,272 (7,989) - (55) - Net cash inflow / (outflow) from investing activities (97,191) (6,772) (97,191) (6,772) Cash flows from financing activities Proceeds from issue of shares (net) Repayments of borrowings Receipt of borrowings Net movement in working capital and trade finance facilities Interest paid Movement in advances from subsidiary Net cash inflow / (outflow) from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at end of year 10 (301) 68,900 (301) (17,699) (64,521) (89,213) 80,638 (16,890) (7,204) - 38,544 28 2,365 2,393 670 64,042 (13,525) - 55,566 1,699 28,596 63,786 (7,204) 13,326 8,990 (29,094) 666 2,365 31,487 2,393 68,900 (94,782) 670 33,307 (13,525) 91,280 85,850 30,821 666 31,487 The accompanying notes form part of and are to be read in conjunction with these financial statements. I PAGE 53 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 1 REPORTING ENTITY Synlait Milk Limited (the ‘Company’) and its subsidiary (together ‘the Group’) is domiciled in New Zealand, registered under the Companies Act 1993 and listed on the New Zealand Stock Exchange, The Company is an issuer for the purposes of the Financial Reporting Act 1993 and its financial statements comply with that Act. Synlait Milk Limited is primarily involved in the manufacture and sale of dairy products. The Company is a limited liability company incorporated and domiciled in New Zealand. The address of its registered office is 1028 Heslerton Road, Rakaia, RD 13, New Zealand. 2 BASIS OF PREPARATION The consolidated financial statements of the Group have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand (‘NZ GAAP’). They comply with New Zealand equivalents to International Financial Reporting Standards (‘NZ IFRS’) and other applicable Financial Reporting Standards, as applicable for profit-oriented entities. The consolidated financial statements also comply with International Financial Reporting Standards (‘IFRS’). The financial statements were authorised for issue by the directors on 19 September 2014. Basis of Measurement These financial statements have been prepared on the historical cost basis except for the following: - Revaluation of available-for-sale financial assets - Financial assets and liabilities (including derivative instruments) at fair value - Land, buildings, plant and equipment Critical accounting estimates The preparation of financial statements in conformity with NZ IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 4. (a) Principles of consolidation The Group’s financial statements consolidate the financial statements of the Company and its subsidiary. A subsidiary is a controlled entity over which the Group has power, is exposed, or has rights, to variable returns from its involvement with the entity, and has the ability to use its power to affect its returns. In June 2013 a subsidiary, Synlait Milk Finance Limited, was set up primarily for holding all banking facilities for the Group and related interest rate swaps. Funds are loaned to Synlait Milk Limited and interest is charged at market rates. (b) Segment reporting The Group operates in one industry, being the manufacture and sale of dairy products. The Board makes resource allocation decisions based on expected cash flows and results of the Group’s operations as a whole and the Group therefore has one segment. Although the Group sells to many different countries, for management reporting purposes the Group operates in one principal geographical area being New Zealand. (c) New Accounting Policy ‑ Share based payments Employees (including Senior Management) of the Group may receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity settled). The cost of equity settled transactions with employees are measured by reference to the grant date fair value of the equity instruments granted. The fair value of equity settled options are recognised as an expense, together with a corresponding increase to the employee benefits reserve within equity, over the vesting period in which the performance and/or service conditions are fulfilled. The total amount to be expensed is based on the fair value of each option along with the best estimate of the number of equity instruments that will ultimately vest which includes an assessment of performance and service conditions. The expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. (d) Reclassified balances Where appropriate, prior year comparatives have been regrouped to conform with the current year classification. Reclassifications are summarised below. PAGE 54 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 The Group has changed the classification of cashflows from the trade finance and working capital facilities within the Statement of Cash Flows resulting in a movement of amounts between operating and financing activities. As a result, the comparative amounts have changed in the Statement of Cash Flows: - 31 July 2013 receipts from customers decreased by $33,307,000; - 31 July 2013 repayments of borrowings increased by $30,735,000; and - 31 July 2013 net movement in working capital and trade finance facilities increased by $64,042,000. Mitsui & Co NZ is Synlait Milk Limited’s export sales agent. Under this agreement Mitsui pays Synlait Milk the amounts invoiced to export customers within an agreed period after shipment of products. The amounts received from Mitsui (the trade finance facility) were previously included in receipts from customers but have been reclassified to be a financing activity. The Group has reclassified these amounts as it considers the Mitsui & Co NZ trade finance facility to be a financing activity in nature. The working capital facility is drawn and repaid on a weekly basis and can be considered analogous to an overdraft facility, the cashflows for which are considered financing in nature. Given the short term nature of the transactions, it is more appropriate to disclose the movements on a net basis as opposed to the total draw downs and total repayments. These changes have no impact on the statements of comprehensive income or financial position. The Group has also changed the classification of some employee costs, depreciation and repairs and maintenance expenditure within the profit and loss component of the Statement of Comprehensive Income to better reflect actual performance resulting in a movement between sales and distribution expenses and administrative and operating expenses. As a result, the comparative amounts have changed in the Statement of Comprehensive Income: - 31 July 2013 sales and distribution expenses increased by $3,063,000; and - 31 July 2013 administrative and operating expenses decreased by $3,063,000. These changes have no impact on the statements of financial position or cash flows. 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The financial statements are presented in New Zealand Dollars ($), which is the Group’s functional currency and are rounded to the nearest thousand ($000). (ii) Transactions and balances Transactions in foreign currencies are translated to the functional currency at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. (b) Revenue recognition (i) Sales of goods Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, discounts and allowances. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, and the associated costs and possible return of goods can be estimated reliably. Transfers of risks and rewards vary depending on the individual terms of the contract of sale. (ii) Interest income Interest income is recognised using the effective interest method. When a loan or receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognised using the original effective interest rate. (c) Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the statement of comprehensive income over the period necessary to match them with the costs that they are intended to compensate. I PAGE 55 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (d) Research and development Expenditure on research activities, undertaken with the prospect of obtaining new scientific or technical knowledge and understanding, is recognised in the statement of comprehensive income as an expense when it is incurred. (e) Income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the profit and loss component of the statement of comprehensive income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the revaluation of land to the extent that any revaluation is unlikely to affect the tax base of the asset. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Tax consolidation group Synlait Milk Limited and its wholly-owned New Zealand controlled entities form a tax consolidation group. (f) Goods and Services Tax (GST) The profit and loss component of the statements of comprehensive income have been prepared so that all components are stated exclusive of GST. All items in the financial position are stated net of GST, with the exception of receivables and payables, which include GST invoiced. (g) Leases Leases on terms where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments with a corresponding liability to the lessor included in the statement of financial position as a finance lease obligation. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Lease payments are apportioned between finance charges and reduction in the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Other leases are operating leases and the leased assets are not recognised on the Group’s statement of financial position. Operating lease payments are recognised as an expense on a straight line basis over the lease term, except where another systematic basis is more representative of the time pattern over which economic benefits from leased assets are consumed. (h) Impairment of non‑financial assets The carrying amounts of the Group’s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. An impairment loss is recognised if the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. A cash generating unit is the smallest identifiable asset group that generates cash flows that are largely independent from other assets and groups. Impairment losses are first recognized as a deduction against revaluation reserves and then recognised in the profit or loss component of the statement of comprehensive income once those reserves have been exhausted. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. PAGE 56 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (i) Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits, and working capital facilities that are repayable on demand and form an integral part of the Group’s cash management. (j) Trade and other receivables Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. The recoverable amount of the Group’s receivables which are carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. Impairment losses on an individual basis are determined by an evaluation of the exposures on an instrument by instrument basis. All individual instruments that are considered significant are subject to this approach. For trade receivables which are not significant on an individual basis, impairment is assessed on a portfolio basis based on numbers of days overdue, and taking into account the historical loss experienced in portfolios with a similar amount of days overdue. (k) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is comprised of direct materials and where applicable, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Cost is determined on a weighted average basis and in the case of manufactured goods, includes direct materials, labour and production overheads. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Investments in subsidiaries (l) Investments in subsidiaries in the Parent financial statements are stated at cost less impairment. (m) Investments and other financial assets Classification The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months, otherwise they are classified as non-current. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’ and ‘cash and cash equivalents’ in the statement of financial position (notes (i) and (j)). (iii) Available for sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period. Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not classified at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the profit and loss component of the statement of comprehensive income. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. I PAGE 57 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognised in other comprehensive income. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the profit and loss component of the statement of comprehensive income as ‘gains and losses from investment securities’. Interest on available-for-sale securities calculated using the effective interest method is recognised in the profit and loss component of the statement of comprehensive income as part of finance income. Dividends on available-for-sale equity instruments are recognised in the profit and loss component of the statement of comprehensive income as part of other income when the Group’s right to receive payments is established. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. Impairment of financial assets (i) Assets carried at amortised cost The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. For the loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the profit and loss component of the consolidated statement of comprehensive income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the profit and loss component of the statement of comprehensive income. (ii) Assets classified as available for sale The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. For debt securities, the Group uses the criteria referred to in (i) above. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in profit and loss component of the statement of comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the consolidated statement of comprehensive income. PAGE 58 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (n) Derivatives The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risk, including forward exchange contracts and interest rate swaps. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated as effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. Hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments are designated as cash flow hedges by the Group. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. (i) Hedge accounting The Group designates certain hedging instruments in respect of foreign currency risk as cash flow hedges. Hedges of foreign currency exchange risk on firm commitments are accounted for as cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash flows of the hedged item. (ii) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income and accumulated as a separate component of equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in Finance costs. Amounts recognised in the hedging reserve are classified from equity to profit or loss (as a reclassification adjustment) in the periods when the hedged item is recognised in profit or loss, in the same line as the recognised hedged item. Hedge accounting is discontinued when the Group revokes the hedging relationships, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies as hedge accounting. Any cumulative gain or loss recognised in the hedging reserve at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in the hedging reserve is immediately recorded in profit or loss. (iii) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the statement of comprehensive income. (o) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Group use a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. I PAGE 59 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (p) Property, plant and equipment Recognition and measurement Property, plant and equipment are initially measured at cost less accumulated depreciation. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. When a self-constructed asset meets the definition of a qualifying asset under NZ IAS 23 ‘Borrowing Costs”, borrowing costs directly attributable to the construction of the asset are capitalised until such a time as the asset is substantially ready for its intended use or sale. When major components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Revaluations Land, buildings and plant and equipment are carried at fair value. Any increase in the value of land, buildings, plant and equipment is recognised in other comprehensive income and presented in the revaluation reserve in equity unless it offsets a previous decrease in value recognised in the profit or loss, in which case it is recognised in the profit or loss. A decrease in value is recognised in the profit or loss where it exceeds the increase previously recognised in equity. Fair value estimation The fair valuation of land is undertaken on a cyclical basis, not exceeding three years, by an independent registered valuer. The valuation considered the highest and best use of the land, which is the current use, and was based on comparable sales for rural blocks within the locality on a per hectare basis. The fair valuation of buildings, plant and equipment is undertaken on a cyclical basis, not exceeding three years, by an independent registered valuer. As the assets are specialized in nature, there is no comparable market data from which to derive a market based valuation. The valuation has consequently been prepared on a depreciated replacement cost basis and assumes that the current use of these assets is the best and highest use. The replacement cost was based on a volume basis for the dryers and an area basis for all other facilities. Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Depreciation Depreciation of property, plant and equipment is recognised in profit or loss on a straight line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. Capital work in progress is not depreciated. The total cost of this work is transferred to the relevant asset category on the completion of the project and then depreciated. The estimated useful lives for the current and comparative periods are as follows: - Buildings - Plant and equipment - Fixtures and fittings 10 - 50 years 3 - 33 years 2 - 14 years Depreciation methods, useful lives and residual values are reassessed at the reporting date. (q) Intangible assets (i) Patents, trademarks and other rights Separately acquired patents and trademarks are shown at historical cost. Patents and trademarks acquired in a business combination are recognised at fair value at the acquisition date. Patents and trademarks have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of patents and trademarks over their estimated useful lives of 10 years. (ii) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on a straight line basis over their estimated useful lives of three to ten years. Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design PAGE 60 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 and testing of identifiable and unique software products controlled by the Group are recognised as intangible assets. (r) Trade and other payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade and other payables are recognised initially at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest method. (s) Interest bearing liabilities Interest bearing liabilities are recognised initially at fair value, net of transaction costs incurred. Interest bearing liabilities are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the profit and loss component of the statement of comprehensive income over the period of the borrowings using the effective interest method. (t) Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction from the proceeds. Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders. (u) Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to shareholders by the weighted average number of shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to shareholders and the number of shares outstanding to include the effects of all potential dilutive shares. (v) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for use. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. (w) Standards, amendments and interpretations to existing standards that are not yet effective Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 August 2014 or later periods but which the Group has not early adopted: - NZ IFRS 9 ‘Financial Instruments: Classification and measurement’ (effective 1 January 2018). NZ IFRS 9 amends the requirements related to the classification and measurement of financial assets and financial liabilities. The Group is considering adopting this standard in the 2015 financial year and is currently assessing the impact of adoption. - NZ IFRS 15, ‘Revenue from Contracts with Customers’ (effective 1 January 2017). NZ IFRS 15 will be effective from the Group’s 2018 financial year. The impact of this standard has not yet been determined. There are no other standards that are not yet effective and that are expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. I PAGE 61 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (x) Standards, amendments, and interpretations effective in 2014 inventory, the industry milk price and the fair value of land, building and plant and equipment. - NZ IFRS 10 ‘Consolidated financial statements’ (effective 1 January 2013). NZ IFRS 10 develops a single consolidation model applicable to all investees. The standard provides that an investor consolidates an investee when it has power, exposure to variability in returns, and a linkage between the two. There is no impact of the standard on the financial statements. - NZ IFRS 12 ‘Disclosure of Interests in Other Entities’ (effective 1 January 2013). This standard replaces existing requirements for disclosure of subsidiaries and joint ventures (now joint arrangements), and makes limited amendments in relation to associates. There is no impact on the recognition or measurement of the financial statements from the change in standard. - NZ IFRS 13 ‘Fair Value Measurement’ (effective 1 January 2013). The Group has applied NZ IFRS 13 for the first time in the current year. NZ IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. NZ IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under NZ IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. - Other than additional disclosures, the application of NZ IFRS 13 has not had any material impact on the amounts recognised in these financial statements. 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of the consolidated financial statements in conformity with NZ IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates and assumptions. Estimates and assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Key sources of estimation uncertainty relate to assessment of impairment of inventory, standard costs used for measuring Inventories are valued at the lower of cost and net realisable value. Estimates are required in relation to net realisable value which is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Reviewing the net realisable values is carried out by management on a periodic basis and any reduction to cost is provided by way of stock provision. The use of a standard cost methodology for inventory requires management estimation in determining the Monthly Milk Price to be applied which form a key component of the product standard cost. The estimate of the industry milk price is a key assumption applied by management in the financial statements. This industry price is used for milk purchased or received from other processors during the year. Land, buildings and plant and equipment are recognised at fair value as described in note 14 (a). 5 SEGMENT INFORMATION (a) Description of segments The Company and Group operate in one industry, being the manufacture and sale of milk powder and milk powder related products. The Board makes resource allocation decisions based on expected cash flows and results of the Company’s operations as a whole and the Group therefore has one segment. Although the Group sell to many different countries, for management reporting purposes the Company and Group operate in one principal geographical area being New Zealand. Revenues of approximately 52% (2013: 56%) are derived from the top three external customers. The proportion of sales volumes by geographical area is summarised below: China Rest of Asia Africa Rest of world 2014 26% 32% 23% 19% 100% 2013 19% 34% 23% 24% 100% PAGE 62 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 6 REVENUE Dairy products Insurance proceeds Other sundry income Management fees 7 EXPENSES The following items of expenditure are included in cost of sales Depreciation and amortisation Employee benefit expense Repairs and maintenance The following items of expenditure are included in sales and distribution expenses Depreciation and amortisation Donations Research and development Rent expense Repairs and maintenance Employee benefit expense The following items of expenditure are included in administrative and operating expenses Depreciation Repairs and maintenance Employee benefit expense Defined benefit contributions - Kiwisaver Directors fees Share based payments expense (note 21) Group Year ended 2014 $’000 Parent Year ended 2013 $’000 2014 $’000 2013 $’000 600,518 420,010 600,518 420,010 - 32 33 1,304 245 38 - 32 33 1,304 245 38 600,583 421,597 600,583 421,597 Group Year ended Parent Year ended 2014 $’000 9,406 9,245 2,774 879 14 326 1,676 332 3,953 1,092 41 7,561 279 440 60 2013 $’000 8,966 6,589 3,109 397 54 312 1,355 332 2,666 819 31 4,344 138 346 - 2014 $’000 9,405 9,245 2,774 879 14 326 1,676 332 3,953 1,092 41 7,561 279 440 60 2013 $’000 8,966 6,589 3,109 397 54 312 1,355 332 2,666 819 31 4,344 138 346 - I PAGE 63 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Deloitte services included in administrative and operating expenses and share capital Audit IPO Taxation advice Financial modelling Accounting advice and other consulting Total 8 FINANCE INCOME AND EXPENSES Interest income on bank deposits Settlement of ineffective portion of cash flow hedges Total finance income Interest and facility fees Capitalised borrowing costs Settlement of ineffective portion of cash flow hedges Total finance costs Total finance costs 9 INCOME TAX (a) Income tax expense Current tax: Current tax on profits for the year Total current tax Deferred tax: Temporary differences Tax losses utilised Adjustment to prior year tax losses brought forward Other prior year adjustments Total deferred tax (note 19) Income tax (expense) / benefit PAGE 64 I 127 - 69 205 95 496 105 473 121 215 40 954 127 - 69 205 95 496 Group Year ended Parent Year ended 2014 $’000 130 1,042 1,172 (8,768) 2,252 - (6,516) (5,344) 2013 $’000 103 1,169 1,272 (12,811) - (714) (13,525) (12,253) 2014 $’000 130 1,042 1,172 (8,768) 2,252 - (6,516) (5,344) 105 473 121 215 40 954 2013 $’000 103 1,169 1,272 (12,811) - (714) (13,525) (12,253) Group Year ended Parent Year ended 2014 $’000 2013 $’000 2014 $’000 2013 $’000 (2,618) (2,618) (693) (4,298) (84) 201 (4,874) (7,492) - - (4,498) - - - (4,498) (4,498) (2,618) (2,618) (693) (4,298) (84) 201 (4,874) (7,492) - - (4,498) - - - (4,498) (4,498) Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (b) Reconciliation of effective tax rate Profit before income tax Income tax using the Company’s domestic tax rate - 28% Other non deductible costs Adjustment to prior year tax losses brought forward Other prior year adjustments Total prior period adjustments Income tax expense (c) Imputation credits Imputation credits available directly and indirectly to the shareholders of the parent company Group Year ended Parent Year ended 2014 $’000 27,095 (7,587) (22) (7,609) (84) 201 117 2013 $’000 16,026 (4,487) (11) (4,498) - - - 2014 $’000 27,095 (7,587) (22) (7,609) (84) 201 117 2013 $’000 16,026 (4,487) (11) (4,498) - - - (7,492) (4,498) (7,492) (4,498) Group Year ended Parent Year ended 2014 $’000 2013 $’000 2014 $’000 2013 $’000 2,618 - 2,618 - (d) Income tax recognised in other comprehensive income The tax (charge)/credit relating to components of other comprehensive income is as follows: Group 31 July 2014 Cash flow hedges Other comprehensive income 31 July 2013 Cash flow hedges Other comprehensive income Parent 31 July 2014 Cash flow hedges Other comprehensive income 31 July 2013 Cash flow hedges Other comprehensive income Tax (expense)/ benefit Before tax After tax $’000 $’000 $’000 (373) (373) (3,724) (3,724) (215) (215) (3,019) (3,019) 104 104 1,043 1,043 60 60 845 845 (269) (269) (2,681) (2,681) (155) (155) (2,174) (2,174) I PAGE 65 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 10 CURRENT ASSETS ‑ CASH AND CASH EQUIVALENTS Cash and cash equivalents Group Parent 2014 $’000 2,393 2013 $’000 2,365 2014 $’000 2,393 2013 $’000 31,487 (a) Risk exposure The Group’s exposure to interest rate risk is discussed in note 24(a,ii). The maximum exposure to credit risk at the end of the reporting period is the carrying amount. (b) Fair value The carrying amount for cash and cash equivalents equals their fair value. 11 CURRENT ASSETS ‑ TRADE AND OTHER RECEIVABLES Net trade receivables Trade receivables Provision for doubtful receivables Other receivables Total receivables Group 2014 $’000 88,585 (100) 88,485 561 2013 $’000 59,090 - 59,090 44 Parent 2014 $’000 88,585 (100) 88,485 561 2013 $’000 59,090 - 59,090 44 89,046 59,134 89,046 59,134 The increase in trade receivables is predominantly due to the increased sales volumes in July 2014 compared to July 2013. (a) Impaired receivables As of 31 July 2014, trade receivables of $9.7 m were overdue but not impaired (2013: $3.5 m). These relate to a number of independent customers for whom there is no recent history of default. The majority has since been collected but $0.9 m remains unpaid which is expected to be collected in the 2015 financial year. The ageing analysis of these overdue trade receivables is as follows: Group Parent 2014 $’000 7,079 1,508 1,142 9,729 2013 $’000 391 3,093 - 3,484 2014 $’000 7,079 1,508 1,142 9,729 2013 $’000 391 3,093 - 3,484 0 to 30 days 30 to 60 days Over 60 days Total trade receivables PAGE 66 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (b) Bad and doubtful trade receivables The Company and Group have recognised a loss of $100,000 (2013: $nil) in respect of bad and doubtful trade receivables during the year ended 31 July 2014. (c) Trade and other receivables Accounts receivable are amounts incurred in the normal course of business. Receivables denominated in other currencies other than the functional currency comprise NZ$81.2 m (2013: $47.3 m) of USD and Euro denominated trade receivables. 12 CURRENT ASSETS ‑ INVENTORIES Raw materials at cost Finished goods at cost Finished goods at net realisable value Total inventories Group Parent 2014 $’000 15,348 29,422 26,492 71,262 2013 $’000 16,047 44,160 4,818 65,025 2014 $’000 15,348 29,422 26,492 71,262 2013 $’000 16,047 44,160 4,818 65,025 Inventories recognised at net realisable value has increased significantly from 2013 as a result of some manufactured infant formula not being able to be sold into the China market as a result of the change in Chinese government regulations. The total provision as at reporting date was $9.9m (2013 $3.1m) with $7.5m relating to infant formula. 13 NON‑CURRENT ASSETS ‑ OTHER FINANCIAL ASSETS Unlisted securities Equity securities Group 2014 $’000 2013 $’000 Parent 2014 $’000 2013 $’000 70 - 70 - In July 2014, Primary Collaboration New Zealand Limited was incorporated with 6,000 shares issued at a par value of $10 each. Synlait Milk Limited has subscribed to 1,000 shares and has fully paid this share capital. An additional capital contribution was made by all shareholders in proportion to their shareholding in July 2014 with Synlait Milk Limited contributing $60,000. I PAGE 67 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 14 NON‑CURRENT ASSETS ‑ PROPERTY, PLANT AND EQUIPMENT Group and Parent Cost or valuation Cost Revaluation Balance at 1 August 2012 Additions Reclassification / transfer Disposals Land Buildings Plant and equipment Fixtures and fittings Capital work in progress $’000 $’000 $’000 $’000 $’000 Total $’000 3,042 170 3,212 - 5 - 31,459 1,761 183,486 10,272 2,396 - 33,220 193,758 2,396 - - - - 3,365 (195) - 13 - 4,317 224,700 - 12,203 4,317 6,592 (3,383) 236,903 6,592 - - (195) Balance at 31 July 2013 3,217 33,220 196,928 2,409 7,526 243,300 - - - - 27,894 - - 44,893 (287) 3,217 61,114 241,534 3,224 180 3,404 1,020 90 - 4,514 1,208 90 - 17,266 967 18,233 7,851 509 (40) 26,553 8,266 509 (70) - - - - - - - - - - - - 98,126 98,126 1,099 (74) 3,434 1,167 - 1,167 286 - - 1,453 430 - (74) (73,886) - - (361) 31,766 341,065 - - - - - - - - - - - 21,657 1,147 22,804 9,157 599 (40) 32,520 9,904 599 (144) 42,879 5,812 35,258 1,809 3,217 3,217 28,706 55,302 170,375 206,276 956 1,625 7,526 210,780 31,766 298,186 Additions Reclassification / transfer Disposals Balance at 31 July 2014 Accumulated depreciation Cost Revaluation Balance at 1 August 2012 Depreciation Revaluation depreciation Disposals Balance at 31 July 2013 Depreciation Revaluation depreciation Disposals Balance at 31 July 2014 Carrying amounts At 31 July 2013 At 31 July 2014 PAGE 68 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (a) Valuations of land and buildings Land, buildings, and plant and equipment were independently valued as at 31 July 2012 by Jones Lang LaSalle using either the depreciated replacement cost method (for buildings and plant and equipment) or market based valuation (for land). The policy in respect of revaluations is described in note 3(p). For buildings, plant and equipment the depreciated replacement cost method represents a tier 3 valuation under the fair value hierarchy. The depreciated replacement cost is defined as the gross current replacement cost reduced by factors providing for age, physical depreciation and technical and functional obsolescence taking in to account the assets’ total estimated useful life and anticipated residual value (if any). The depreciated replacement cost includes all the costs to purchase, deliver and install the asset. The key sensitivity of the depreciated replacement cost valuation relates to the estimated useful lives of the assets being valued. As there are a large number of assets all with varying estimated useful lives, it is not practical to determine a number sensitivity to this input factor. The valuation for land, which is a tier 2 valuation under the fair value hierarchy, has been completed by reference to transactions which have been observed in the market. The fair value determined in the valuation assumes that there is a willing, but not anxious buyer and seller; a reasonable period within which to negotiate the sale, having regard to the nature and situation of the land and the state of the market for land of the same kind; no account is taken of the value of other advantages or benefit additional to market value to the buyer incidental to ownership of the property being valued; and the Group has sufficient resources to negotiate an agreement for the sale of the land. The key sensitivity to the market based valuation is the observable market transactions on which the valuation is based. It is impractical to provide numerical sensitivities for such valuations. Land, buildings, and plant and equipment was valued at $208.6m as at 31 July 2012. If the cost model had been used, the carrying value of land, buildings and plant and equipment would have been $3.1m, $53.9m and $198.0m respectively, at reporting date. Management has estimated that the valuation has not materially changed since 2012 and that depreciated replacement cost is a fair estimate of current value. In accordance with policy, an independent valuation will be undertaken during the 2015 financial year. (b) Impairment During the period, property, plant and equipment have been examined for impairment. No indicators of impairment have been identified and no material items of property, plant and equipment are considered to be impaired. (c) Capital work in progress Assets under construction includes capital expenditure projects, until they are commissioned and transferred to fixed assets. Capital work in progress of $31.8 m at balance date is predominantly constituted of the project to date spend ($21.5 m) on the construction of the third dryer. (d) Capitalised borrowing costs During the year, the Group has capitalised borrowing costs amounting to $2.3 m (2013: $nil) on qualifying assets. Interest has been capitalised at the rate in which borrowing has been specifically drawn to fund the qualifying asset as disclosed in note 18. I PAGE 69 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 15 NON‑CURRENT ASSETS ‑ INTANGIBLE ASSETS Group and Parent Year ended 31 July 2013 Opening net book value Additions Development costs recognised as an asset Amortisation charge Closing net book value Year ended 31 July 2014 Opening net book value Additions Development costs recognised as an asset Disposals Amortisation charge Closing net book value Patents, trademarks and other rights Computer software $’000 $’000 Brand $’000 Supplier contracts Intangibles in progress $’000 $’000 65 8 - - 73 73 - - - (39) 34 2,533 - 273 (336) 2,470 2,470 - 683 - (754) 2,399 102 55 - - 157 157 4 - (97) - 64 171 - - (90) 81 81 - - - (81) - - 1,544 (273) - 1,271 1,271 1,504 (683) - - 2,092 Intangibles in progress of $2.1 m at balance date is predominantly constituted of the project to date spend ($1.5 m) on the development and implementation of sales and operational planning software. 16 TRADE AND OTHER PAYABLES Trade payables Accrued expenses Employee entitlements Total trade and other payables Group Parent 2014 $’000 69,526 45,625 1,579 116,730 2013 $’000 31,671 24,199 1,665 57,535 2014 $’000 69,526 44,902 1,579 116,007 Total $’000 2,871 1,607 - (426) 4,052 4,052 1,508 - (97) (874) 4,589 2013 $’000 31,671 24,085 1,665 57,421 Payables denominated in other currencies other than the functional currency comprise NZ$0.5 m (2013: $2.8 m) of USD and AUD denominated trade payables and accruals. The large increase in payables and accruals from July 2013 has been driven by the increased milk price, of which final payments to suppliers remain outstanding. PAGE 70 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 17 ADVANCES FROM SUBSIDIARY Current liabilities Advances from Synlait Milk Finance Limited Non current liabilities Advances from Synlait Milk Finance Limited Group 2014 $’000 2013 $’000 Parent 2014 $’000 - - - - - - - - 13,660 13,660 90,947 90,947 2013 $’000 63,926 63,926 27,355 27,355 The term of the advances from subsidiary have been loaned on the same terms as the banking facilities. The interest rates used are the market rates and therefore the carrying value of the advances represent fair value. 18 LOANS AND BORROWINGS Current liabilities Working capital facility Trade finance facility Non-current liabilities Bank loans Loan facility fees Group Year ended Parent Year ended 2014 $’000 12,500 50,613 63,113 91,535 (159) 91,376 2013 $’000 33,079 46,924 80,003 28,596 (679) 27,917 2014 $’000 - 50,613 50,613 - - - 2013 $’000 - 46,924 46,924 - - - (a) Terms of loans and borrowings The bank loans and working capital facility within Synlait Milk Limited are secured under the terms of the General Security Deed dated 26 June 2013, by which all present and future property is secured to the ANZ Bank and Bank of New Zealand. The Company facilities include: - A secured revolving credit facility of $75m that matures on 31 July 2016 - A secured term facility of $135m that matures on 31 July 2017 to fund the construction of Dryer 3 - A secured working capital facility of $85m that matures on 31 October 2014 (Management are currently finalising the level of this facility required during the 2015 financial year at which point this facility will be extended to October 2015) - An unlimited and unsecured trade finance facility from Mitsui & Co. Limited that matures on 31 July 2015 I PAGE 71 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 The Group is subject to capital requirements imposed by its bank through covenants agreed as part of the lending facility arrangements. The Group has met all externally imposed capital requirements for the twelve months ended 31 July 2014 and 31 July 2013. Secured term loan facility (D3) - ANZ / BNZ Secured revolving credit facility - ANZ / BNZ Secured working capital facility - ANZ / BNZ Trade finance facility - Mitsui & Co. Limited Nominal Year of Carrying Carrying Interest rate % maturity amount 2014 amount 2013 5.04 4.82 4.83 1.41 2017 2016 2015 2015 16,678 74,857 12,500 50,613 - 27,917 33,079 46,924 The nominal interest rate is calculated by adding the BKBM rate (or Libor rate for Mitsui trade finance facility) and the marginal rate. It excludes line fees and swap costs. Group 2014 $’000 817 3,128 - 3,945 2013 $’000 713 278 4,382 5,373 Parent 2014 $’000 575 3,128 - 3,703 2013 $’000 515 278 4,382 5,175 (20,460) (17,108) (20,460) (17,108) (10) (20,470) (16,525) (20) (17,128) (11,755) (10) (20,470) (16,767) (20) (17,128) (11,953) Balance 1 Aug 2012 Recognised in profit or loss $’000 (13,760) (330) 147 5,641 (8,302) $’000 (3,348) - 111 (1,259) (4,496) Recognised in other comprehen- sive income Balance 31 July 2013 $’000 $’000 - (17,108) 1,043 - - 713 258 4,382 1,043 (11,755) 19 DEFERRED TAX ASSETS AND LIABILITIES The balance comprises temporary differences attributable to: Assets Derivatives Other items Tax losses carried forward Total deferred tax assets Liabilities Property, plant and equipment Other items Total deferred tax liabilities Total deferred tax Movements - Group Property, plant and equipment Derivatives Other items Tax losses carried forward Total PAGE 72 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Balance 1 Aug 2013 Recognised in profit or loss $’000 (17,108) 713 258 4,382 $’000 (3,352) - 2,860 (4,382) Recognised in other comprehen- sive income Balance 31 July 2014 $’000 $’000 - 104 - - (20,460) 817 3,118 - (11,755) (4,874) 104 (16,525) Balance 1 Aug 2012 Recognised in profit or loss $’000 (13,760) (330) 147 5,641 (8,302) $’000 (3,348) - 111 (1,259) (4,496) Balance 1 Aug 2013 Recognised in profit or loss $’000 (17,108) 515 258 4,382 (11,953) $’000 (3,352) - 2,860 (4,382) (4,874) Recognised in other comprehen- sive income $’000 - 845 - - Balance 31 July 2013 $’000 (17,108) 515 258 4,382 845 (11,953) Recognised in other comprehen- sive income $’000 - 60 - - 60 Balance 31 July 2014 $’000 (20,460) 575 3,118 - (16,767) 2014 Shares 2013 Shares 2014 $’000 2013 $’000 Property, plant and equipment Derivatives Other items Tax losses carried forward Total Movements - Parent Property, plant and equipment Derivatives Other items Tax losses carried forward Total Property, plant and equipment Derivatives Other items Tax losses carried forward Total 20 SHARE CAPITAL (a) Share capital Ordinary shares On issue at beginning of period 146,341,197 51,022,858 172,548 103,648 Share split Issue of shares Share issue costs - - - 61,227,429 34,090,910 - - - (301) - 75,000 (6,100) 146,341,197 146,341,197 172,247 172,548 The share split in 2013 was to ensure there was the required number of shares in Synlait Milk Limited prior to the IPO on 23 July 2013. The issue of new shares formed part of the IPO of the Company on 23 July 2013. I PAGE 73 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 The weighted average number of shares during the year of 146,341,197 (2013: 112,904,085) is used to calculate the Earnings per Share. (b) Ordinary shares All issued shares are fully paid and have no par value. The holders of Ordinary Shares are entitled to receive dividends as declared from time to time. Ordinary shares are entitled to one vote per share at meetings of the Company. All Ordinary Shares rank equally with regard to the Company’s residual assets. (c) Capital risk management The Company and Group’s capital includes share capital, retained earnings and reserves. The Company and Group’s policy is to maintain a sound capital base so as to maintain investor and creditor confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Company recognised the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Company and Group are subject to various security ratios within the bank facilities agreement. The Company and Group’s policies in respect of capital management and allocation are reviewed by the Board of Directors. 21 SHARE‑BASED PAYMENTS The Group operates two share based incentive plans. The first is an equity settled plan for senior management and the second is an equity settled plan for all other employees. The plans are designed to enhance the alignment between Shareholders and the employees of the company. (a) IPO Incentive Scheme The Group has entered into an agreement with each participant which will provide them with a conditional contractual right to be issued or transferred a predetermined number of shares on the third anniversary of completion of the listing of the Group on the NZX Main Board (the Performance Date). The issue or transfer of shares pursuant to this scheme will be at an issue price equal to the IPO listing price of $2.20. Each participant has been provided with an entitlement which has a value (calculated as the number of new shares they could receive multiplied by the IPO listing price) equal to a maximum of 75% of their base salary as at 1 August 2013. That entitlement is split into three equal tranches of 25%. The issue or transfer of new shares is conditional on the pre-determined performance and service conditions being satisfied. The performance conditions will be assessed at the end of each of the three years following the listing of the Group on the NZX Main Board. There are two separate performance conditions each of which must be satisfied. The first requires the Group’s net profit after tax (NPAT) for the relevant financial year to be at least 10% above the budgeted NPAT for those periods. If this condition is not met in any period, then the award for this period will never vest, even if the condition outlined below is met. The second requires certain annual compound growth targets in total shareholder return (TSR) to be satisfied as follows: 20% or more 15% 12% Less than 12% 25.00 18.75 6.25 - TSR means the total return, as determined by the Board of Directors (the Board) in consultation with an independent expert, to ordinary shareholders comprising any movement in the market price of the Shares plus gross dividends, expressed as a percentage of the market price at the start of the relevant year. For these purposes the market price is the volume weighted average market price of the Shares on the NZX Main Board over the twenty business days prior to the relevant assessment date. The market price at the start of the first year is the IPO listing price of $2.20. If the performance conditions are not satisfied in full for the first and / or second tranche, the relevant tranche(s) will be retested at the end of each following year up to and including on the Performance Date. Retesting of the TSR performance condition will be based on the compound growth in TSR over the relevant years since the IPO. The highest TSR performance result over the applicable testing dates will be adopted. Notwithstanding that the performance conditions may be satisfied in part or full for any or all of the three tranches, participants must also satisfy the service conditions. One of the service conditions is that the participant must continue to be in full time employment with Synlait Milk Limited at the Performance Date. In addition a participant will only be issued or transferred shares under this scheme if the closing price of the shares on the NZX Main Board on the Performance Date is above the IPO listing price of $2.20. There will be no restriction on the sale of the shares once they have been issued or transferred to participants, however participants remain subject to the Group’s share trading policy applicable to all employees, and those shares will have full voting and dividend rights. PAGE 74 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Should any of the performance or service conditions not be met, other than for a qualifying reason, or the executive does not execute the option, the right to shares will be forfeited and the participant will receive no benefits under the plan (subject to the Board exercising a discretion to allow some or all of the shares or notional shares to vest). The IPO incentive scheme represents the grant of in substance nil price options. The fair value of the options granted under the IPO incentive scheme are estimated as at the date of grant using an option pricing model that takes into account the terms and conditions upon which the options were granted. In accordance with the rules of the plan, the model simulates the Group’s total shareholder return relative to the sliding performance scale over the vesting period. The model takes into account the paths of outcomes that would result in vesting in relation to the TSR performance condition, the cost of equity, share price volatilities, an assessment of the probability of vesting to produce a predicted fair value for each option. The fair value of each option is then applied to the number of options expected to vest to determine a total plan fair value. The NPAT performance condition and the service condition are taken into account in determining the number of options expected to vest. As some of the prerequisite conditions for this scheme were not satisfied during 2014, some of the options granted have been forfeited as summarised below. The following table sets out the number of, and movement in, share options during the year: Outstanding 1 August Granted during the year Forfeited during the year Outstanding 31 July Group Year ended Parent Year ended 2014 2013 2014 2013 - 1,564,709 (521,570) 1,043,139 - - - - - 1,564,709 (521,570) 1,043,139 - - - - Given the extensive number of permutations of potential outcomes, the options have been valued using a probabilistic option-pricing model. Management have assessed the likelihood of each of the outcomes in satisfying the varying TSR conditions and the other key inputs into this model are listed below: Risk free rate Market risk premium Market debt / equity Volatility Share price at grant date Total value of options granted at grant date ($000’s) Volatility has been estimated by reference to trading entities similar to the Group. First Tranche Second Tranche Third Tranche 3.0% 5.5% 30.0% 20.0% $2.20 862 3.6% 5.5% 30.0% 20.0% $3.65 897 3.6% 5.5% 30.0% 20.0% $3.70 155 I PAGE 75 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (b) Short Term Incentive Scheme Under the wider employee plan, every employee, other than those included in the IPO incentive scheme, will automatically receive shares in SML equivalent to a fixed amount divided by the market price of Synlait shares on vesting date. The eligibility to receive shares is dependent on continued employment through the vesting period and the Company’s net profit before tax performance. The participant receives a tax paid bonus equivalent to the fixed amount agreed under the plan if vesting occurs. The vesting period for the plan is from November 2013 through to the date upon which the financial results for the financial year ended 31 July 2014 are announced. The fair value of the rights under the wider employee incentive plan is considered to equal the tax paid fixed amount payable. 175 letters of offer were extended under the employee share plan totalling a maximum $522,000 (including PAYE) in November 2013. As the prerequisite performance conditions for this scheme were not satisfied during 2014, all options granted have been subsequently forfeited. (c) Expenses arising from share‑based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Group $’000 Year ended 2014 $’000 60 2013 $’000 - Parent Year ended 2014 $’000 60 2013 $’000 - Expenses for equity settled share based payment transactions 22 RESERVES AND RETAINED EARNINGS (a) Nature and purpose of reserves (i) Property, plant and equipment revaluation reserve The revaluation reserve arises on the revaluation of land, buildings, plant and equipment. Where a revalued asset is sold, that portion of the reserve which relates to that asset, and is effectively realised, is recognised in retained earnings. (ii) Hedging reserve ‑ cash flow hedges The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments relating to hedged transactions that have not yet occurred. (iii) Employee benefits reserve The employee benefits reserve is comprised of the cumulative share based payment expense for share options note yet vested. (b) Dividends No dividends were declared by the Company or the Group during the year. PAGE 76 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 23 RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES Profit for the year Non-cash and non operating items: Group Year ended Parent Year ended 2014 $’000 19,603 2013 $’000 11,528 2014 $’000 19,603 2013 $’000 11,528 Depreciation and amortisation of non-current assets 11,377 10,182 11,377 10,182 Loss on sale of fixed assets Write off intangibles Non-cash share based payments expense Interest costs classified as financing cash flow Interest received classified as investing cash flow Deferred tax Gain on derivative / financial instruments Movements in working capital: (Increase) / decrease in trade receivables (Increase) / decrease in other receivables (Increase) / decrease in prepayments (Increase) / decrease in inventories (Increase) / decrease in other current assets (Decrease) / increase in trade and other payables (Decrease) / increase in current tax liabilities Net cash inflow from operating activities 84 97 60 5,474 (130) 4,874 (2,249) - - - 13,525 (1,272) 4,496 84 97 60 5,474 (130) 4,874 - (1,208) - - - 13,525 (1,272) 4,496 - (29,395) (38,846) (29,395) (72,941) (517) (216) (6,237) (5,963) 59,195 2,618 58,675 260 (411) (34,279) 806 (13,084) - (47,095) (517) (216) (6,237) (5,963) 58,586 2,618 59,107 33,307 (411) (34,279) 806 (13,198) - (48,257) I PAGE 77 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 24 FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures. (a) Market risk (i) Foreign exchange risk The Group enters into derivative arrangements in the ordinary course of business to manage foreign currency risk. The Board coordinates risk policies on a regular basis. The Group is exposed to foreign currency risk on it’s sales, which are predominantly denominated in US dollars. The Group is also exposed to foreign currency risk on the purchase of capital equipment from overseas. The Group has a Board approved treasury policy that sets the parameters under which foreign exchange cover is to be taken. The Group’s exposure to foreign currency risk at the reporting date was as follows: Trade receivables, being Statement of Financial Position exposure before hedging activities 31 July 2014 31 July 2013 USD $’000 67,147 Euro $’000 1,393 USD $’000 37,803 Euro $’000 3 The Group holds derivative contracts with notional balances of US$135.0 m (31 July 2013: US$97.0 m) in respect of future sale transactions. The Group’s exposure to foreign currency in the period ended 31 July 2014 is limited to it’s sales of dairy products, purchases of raw materials for production and capital equipment purchases. (ii) Interest rate risk Interest rate risk is the risk that the value of the Group’s assets and liabilities will fluctuate due to changes in market interest rates. The Group is exposed to interest rate risk primarily through its bank overdrafts and borrowings. The Group manages it’s interest rate risk by using interest rate swaps to hedge it’s floating rate debt. The Group has a Board approved treasury policy that sets the parameters to the extent of the cover taken. As at the reporting date, the Group had the following interest rate swap contracts outstanding: Less than 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years 5 to 6 years 6 to 7 years 7 to 8 years 8 to 9 years 9 to 10 years 31 July 2014 31 July 2013 Weighted Balance average interest rate Weighted average interest rate % 4.85% 4.60% 4.71% 4.73% 4.76% 4.79% 4.82% 4.85% 4.85% 4.86% $’000 68,583 129,000 116,500 94,000 71,750 50,000 35,000 25,000 19,167 15,000 % 4.32% 5.23% 4.89% 4.04% - - - - - - Balance $’000 105,129 57,527 39,000 20,000 - - - - - - The above balances include forward start swap contracts for various periods and do not necessarily reflect the current active contracts held at any one point in time. PAGE 78 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 In managing interest rate risks, the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over the longer-term, however, changes in interest rates will have an impact on profit. (iii) Sensitivity analysis The following table summarises the sensitivity of the Group’s profit and equity to interest rate risk and foreign exchange risk. The sensitivity analysis below has been determined based on the mark to market impact on financial instruments of changing interest and foreign exchange rates at balance date. The analysis is prepared assuming the amount of the financial instrument outstanding at the balance sheet date was outstanding for the whole year. Consolidated Group Parent 31 July 2014 1% increase in interest rate 1% decrease in interest rate 2014 Profit $’000 - - Equity $’000 3,692 (3,902) 5% increase in exchange rate (1,630) (5,404) 5% decrease in exchange rate 1,475 4,675 2013 Profit $’000 - - (19) 18 Equity $’000 473 (473) 2014 2013 Profit $’000 Equity $’000 Profit $’000 Equity $’000 - - - - (4,627) (1,630) (5,404) 4,187 1,475 4,675 - - (19) 18 - - (4,627) 4,187 (b) Credit risk The Group’s exposure to credit risk is mainly influenced by its customer base and banking counterparties. Management has a credit policy in place under which each new customer is rigorously analysed for credit worthiness. Investments and derivatives are only made with reputable financial banks. The carrying amount of financial assets represents the Group’s maximum credit exposure. Synlait Milk Limited guarantees all facilities held by Synlait Milk Finance Limited. I PAGE 79 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (c) Liquidity risk Liquidity risk represents the Group’s ability to meet its contractual obligations. The Group evaluates its liquidity requirements on an ongoing basis. The Group has negotiated banking facilities sufficient to meet it’s medium term facility requirements. The Group has internal limits in place in order to reduce exposure to liquidity risk, as well as having committed lines of credit. It is the Group’s policy to provide credit and liquidity enhancements only to wholly owned subsidiaries. The total repayments and associated maturity of financial liabilities as at balance date is reported below. Group At 31 July 2014 Working capital facility Trade and other payables Trade finance facility Loans and borrowings Derivative financial instruments Total At 31 July 2013 Working capital facility Trade and other payables Trade finance facility Loans and borrowings Derivative financial instruments Total Less than 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total $’000 $’000 $’000 $’000 $’000 12,513 116,730 50,666 4,449 2,916 - - - 79,306 88 187,274 79,394 33,605 57,536 47,697 2,054 4,379 145,271 357 - - 2,836 440 3,633 - - - 17,519 263 17,782 - - - 29,686 - 29,686 - - - - 127 127 - - - - - - 12,513 116,730 50,666 101,274 3,394 284,577 33,962 57,536 47,697 34,576 4,819 178,590 PAGE 80 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Parent At 31 July 2014 Trade and other payables Trade finance facility Advances from subsidiary Derivative financial instruments Total At 31 July 2013 Trade and other payables Trade finance facility Advances from subsidiary Derivative financial instruments Total (d) Financial instruments by category Financial assets Group At 31 July 2014 Cash and cash equivalents Derivative financial instruments Trade and other receivables Available for sale financial assets At 31 July 2013 Cash and cash equivalents Derivative financial instruments Trade and other receivables Less than 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total $’000 $’000 $’000 $’000 $’000 116,007 50,666 18,159 2,443 - - - - 79,394 17,782 - - 187,275 79,394 17,782 57,421 47,697 66,506 2,980 174,604 - - 3,193 - 3,193 - - 29,124 - 29,124 - - 127 - 127 - - - - - 116,007 50,666 115,462 2,443 284,578 57,421 47,697 98,823 2,980 206,921 Derivatives used for hedging Loans and receivables Available for sale Total $’000 $’000 $’000 $’00 - 1,674 - - 2,393 - 89,046 - 1,674 91,439 - 1,224 - 1,224 2,365 - 59,134 61,499 - - - 70 70 - - - - 2,393 1,674 89,046 70 93,183 2,365 1,224 59,134 62,723 I PAGE 81 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Derivatives used for hedging Loans and receivables Available for sale $’000 $’000 $’000 - 1,595 - - 2,393 - 89,046 - 1,595 91,439 - 1,138 - 1,138 31,487 - 59,134 90,621 - - - 70 70 - - - - Derivatives used for hedging At amortised cost $’000 $’000 Total $’000 2,393 1,595 89,046 70 93,104 31,487 1,138 59,134 91,759 Total $’000 3,394 12,500 50,613 - 12.500 50,613 3,394 - - - - 116,730 116,730 91,376 91,376 3,394 271,219 274,613 4,819 - - - - - 33,079 46,924 57,535 27,917 4,819 33,079 46,924 57,535 27,917 4,819 165,455 170,274 Parent At 31 July 2014 Cash and cash equivalents Derivative financial instruments Trade and other receivables Available for sale financial assets At 31 July 2013 Cash and cash equivalents Derivative financial instruments Trade and other receivables Financial liabilities Group At 31 July 2014 Derivative financial instruments Working capital facility Trade finance facility Trade and other payables Borrowings At 31 July 2013 Derivative financial instruments Working capital facility Trade finance facility Trade and other payables Borrowings PAGE 82 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Parent At 31 July 2014 Derivative financial instruments Trade finance facility Trade and other payables Borrowings At 31 July 2013 Derivative financial instruments Trade finance facility Trade and other payables Borrowings 25 FINANCIAL INSTRUMENTS (a) Financial instruments Derivative balances comprise of: Foreign currency forward contracts Interest rate swaps Balance at end of period Classified as: Non current asset Current asset Non current liabilities Current liabilities Derivatives used for hedging $’000 At amortised cost $’000 2,443 - - - 2,443 2,980 - - - - 50,613 116,007 104,607 271,227 - 46,924 57,421 91,281 Total $’000 2,443 50,613 116,007 104,607 273,670 2,980 46,924 57,421 91,281 2,980 195,626 198,606 Group Year ended Parent Year ended 2014 $’000 (848) (872) (1,720) 42 1,632 (478) (2,916) (1,720) 2013 $’000 (1,841) (1,754) (3,595) 86 1,138 (440) (4,379) (3,595) 2014 $’000 (848) - (848) - 1,595 - (2,443) (848) 2013 $’000 (1,842) - (1,842) - 1,138 - (2,980) (1,842) I PAGE 83 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (b) Fair value estimation The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1). Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2). Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). The following table presents the Group’s assets and liabilities that are measured at fair value at 31 July 2014. Level 1 Level 2 Level 3 Total balance $’000 $’000 $’000 $’000 - - - - - - - - - - - - - - - - 77 1,518 79 1,674 3 2,440 951 3,394 189 949 86 1,224 1,187 1,792 1,840 4,819 - - - - - - - - - - - - - - - - 77 1,518 79 1,744 3 2,440 951 3,394 189 949 86 1,224 1,187 1,792 1,840 4,819 Group At 31 July 2014 Assets Foreign exchange contracts Options - foreign exchange Interest rate swaps Total assets Liabilities Foreign exchange contracts Options - foreign exchange Interest rate swaps Total liabilities At 31 July 2013 Assets Foreign exchange contracts Options - foreign exchange Interest rate swaps Total assets Liabilities Foreign exchange contracts Options - foreign exchange Interest rate swaps Total liabilities PAGE 84 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Parent At 31 July 2014 Assets Foreign exchange contracts Options - foreign exchange Total assets Liabilities Foreign exchange contracts Options - foreign exchange Total liabilities At 31 July 2013 Assets Foreign exchange contracts Options - foreign exchange Total assets Liabilities Foreign exchange contracts Options - foreign exchange Total liabilities Level 1 $’000 Level 2 $’000 Level 3 Total balance $’000 $’000 - - - - - - - - - - - - 77 1,518 1,595 3 2,440 2,443 189 949 1,138 1,187 1,792 2,979 - - - - - - - - - - - - 77 1,518 1,665 3 2,440 2,443 189 949 1,138 1,187 1,792 2,979 The fair value of financial instruments traded in active markets is based on quoted market prices at the balance date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in Level 1. The Group is subject to International Swaps and Derivatives Association (ISDA) master agreements with its counterparties, thus where relevant, settlement of financial instruments are netted. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. Specific valuation techniques used to value financial instruments include: - Quoted market prices or dealer quotes for similar instruments; - The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves; - The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance date, with the resulting value discounted back to present value; - The fair value of the forward foreign exchange options are valued by projecting the cash flows that will occur and then discounting the cash flows to the valuation date using a zero-coupon yield curve. The future cash flows have been determined using an implied forward rate calculated with reference to exchange rate volatilities; - Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments. Note that all of the resulting fair value estimates are included in Level 2. I PAGE 85 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 26 CONTINGENCIES As at 31 July 2014 the Parent entity and Group had no contingent liabilities or assets (2013:$Nil). 27 COMMITMENTS (a) Capital commitments Capital expenditure contracted for at the end of the reporting period but not yet incurred is as follows: Lactoferrin Blending and canning Drystore 3 Dryer 3 Administration and laboratory building Transport yard Other Total Group 2014 $’000 - - - 78,322 11,946 775 266 2013 $’000 9,790 15,375 13,557 - - - - Parent 2014 $’000 - - - 78,322 11,946 775 266 2013 $’000 9,790 15,375 13,557 - - - - 91,309 38,722 91,309 38,722 The above balances have been committed in relation to future expenditure on capital projects. Amounts already spent have been included as work in progress. (b) Operating lease commitments – group/company as lessee Less than one year Between one and five years Total Group 2014 $’000 69 120 189 2013 $’000 578 144 722 Parent 2014 $’000 69 120 189 2013 $’000 578 144 722 The operating leases relate to the leasing of warehouse space, vehicles and printers. All terms are reviewed on a regular basis. All leases are subject to potential renewal. PAGE 86 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 28 RELATED PARTY TRANSACTIONS (a) Parent entity The parent entity is Bright Dairy Holding Limited and the ultimate parent is Bright Dairy and Food Limited which is domiciled in the Peoples Republic of China. Bright Dairy Holding Limited hold 39.12% of the shares issued by the Company (2013: 39.12%). (b) Other related entities In June 2013 a subsidiary of Synlait Milk Limited, Synlait Milk Finance Limited, was set up primarily for holding all banking facilities for the Group and related interest rate swaps. Funds are loaned to Synlait Milk Limited and interest is charged at market rates. (c) Key management and personnel compensation Other than their salaries and bonus incentives, there are no other cash benefits paid or due to directors and executive officers as at 31 July 2014. The total short-term benefits paid to the key management and personnel is set out below. Short-term benefits Share based payment expense (note 21) 2014 $’000 3,538 34 2013 $’000 3,211 - During the year, the executive team was realigned into a Senior Leadership Team of seven including the CEO (2013: nine). The short term benefits paid to these key management personnel was $3.1m for the year ended 31 July 2014. (d) Other transactions with key management personnel or entities related to them Information on transactions with key management personnel or entities related to them, other than compensation, are set out below. (i) Loans to directors There were no loans to directors issued during the period ended 31 July 2014 (2013: $nil). (ii) Other transactions and balances Directors of the Company control 3.8% of the voting shares of the company at balance date (2013: 3.8%). (e) Subsidiaries Investments in subsidiaries are set out in note 29. I PAGE 87 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 (f) Transactions with related parties Purchase of goods and services Bright Dairy and Food Co Ltd - Directors fees Synlait Farms Limited - Purchase of raw milk Sale of goods and services Bright Dairy and Food Co Ltd - Sale of milk powder products Bright Dairy and Food Co Ltd - Reimbursement of costs Synlait Farms Limited - Management fees received Interest expense Synlait Milk Finance Limited Group Year ended Parent Year ended 2014 $’000 161 - 22,210 (64) - - 2013 $’000 183 42,420 2014 $’000 161 - 2013 $’000 183 42,420 8,470 22,210 8,470 87 33 - - - 87 33 6,835 114 All transactions with related parties are at arm’s length on normal trading terms. (g) Outstanding balances The following balances are outstanding at the reporting date in relation to transactions with related parties: Note that as at 28 February 2013 Synlait Farms Limited ceased to be a related party due to divestment from Synlait Limited. Current receivables (sales of goods and services) Bright Dairy and Food Co Ltd - Sale of milk powder products Bright Dairy and Food Co Ltd - Reimbursement of costs Current payables (purchases of goods) Synlait Farms Limited - purchase of raw milk Synlait Milk Finance Limited Group Year ended Parent Year ended 2014 $’000 1,336 (64) 2013 $’000 325 58 2014 $’000 1,336 (64) - - 4,439 - - 104,607 2013 $’000 325 58 4,439 91,281 PAGE 88 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 29 INVESTMENTS IN SUBSIDIARIES The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2(a)(i). Name of entity Country of incorporation Class of shares Synlait Milk Finance Limited New Zealand Ordinary Equity holding 2014 % 100 2013 % 100 In June 2013 a subsidiary, Synlait Milk Finance Limited, was set up primarily for holding all banking facilities for the Group and related interest rate swaps. Funds are loaned to Synlait Milk Limited and interest is charged at market rates. 30 COMPARISON OF PROSPECTIVE FINANCIAL INFORMATION Prospective Statement of Comprehensive Income For the year ending 31 July 2014 Revenue Cost of sales Gross Profit Other income Sales and distribution expenses1 Administrative and operating expenses1 Earnings before net financing costs and income tax2 Add back depreciation and amortisation expense2 Earnings before net finance costs, income tax, depreciation and amortisation2 Net financing costs Profit before income tax Income tax expense Profit for the year Items that may be reclassified subsequently to profit and loss Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on other comprehensive income Total comprehensive income for the year Group Group Year ended Year ended 2014 2014 Notes Actual Prospectus Variance a b c d e $’000 600,518 $’000 524,447 $’000 76,071 (523,430) (448,017) (75,413) 77,088 76,430 65 (23,305) (21,409) 32,439 11,377 43,816 (5,344) 27,095 (7,492) 19,603 1,875 (2,249) 104 19,333 30 (24,727) (19,648) 32,085 11,893 43,978 (4,766) 27,319 (7,649) 19,670 1,400 (1,104) (84) 19,882 658 35 1,422 (1,761) 354 (516) (162) (578) (224) 157 (67) 475 (1,145) 188 (549) 1 When necessary, current year actuals have been regrouped to conform with the classification of the prospective financial information to enable a fair comparison. 2 The above Non GAAP financial information was included in the prospectus and therefore has been included in these financial statements for comparative purposes. EBITDA is a metric which management monitors to operate the business. I PAGE 89 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Explanation of variances (a) Revenue for the year was higher than PFI by $76.1 m, primarily due to an increase in dairy commodity prices and the ultimate sales price achieved by Synlait. (b) Gross Profit, while in line with PFI incorporates the upside associated with our product mix benefits as well as a number of costs associated with lower infant formula sales than forecast, provisioning against infant formula inventories, product sales phasing impacts and a high foreign exchange effective rate. (c) Lower export freight costs than forecast have kept sales and distribution costs below forecast. (d) Higher than forecast indirect employee costs have resulted in administrative and operating expenses exceeding forecast. (e) Lower operating cash flow during the year has resulted in higher than forecast working capital facility balances and a higher financing cost as a result. Prospective Statement of Changes in Equity For the year ending 31 July 2014 Equity at the start of the period Group Group Year ended Year ended 2014 2014 Notes Actual Prospectus Variance $’000 164,038 $’000 164,991 $’000 (953) Profit for the year 19,603 19,670 (67) Items that may be reclassified subsequently to profit and loss Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to profit and loss Income tax on income and expenses recognised directly in equity Total other comprehensive loss Share issue costs Employee benefits reserve Total contributions by and distributions to owners Equity at the end of the period f f g 1,875 (2,249) 104 (270) (301) 60 (241) 1,400 (1,104) (84) 212 - 330 330 475 (1,145) 188 (482) (301) (270) (571) 183,130 185,203 (2,073) Explanation of variances (f) Movement in reserves is due to the mark to market value of derivatives being higher than PFI due to the fall of the NZD/USD exchange rate in the second half of July. (g) Employee benefits reserve is lower than PFI due to a revision of the non-market conditions relevant to the valuation of the share options following the forfeiture of some options in FY14. PAGE 90 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Prospective Financial Position - For the year ending 31 July 2014 Assets Current assets Cash and cash equivalents Trade and other receivables Goods and services tax refundable Income accruals and prepayments Inventories Derivative financial instruments Total current assets Non-current assets Property, plant and equipment1 Other investments Intangible assets1 Derivative financial instruments Total non-current assets Total assets Liabilities Current liabilities Working capital facility Trade and other payables Current tax liabilities Trade finance facility Derivative financial instruments Total current liabilities Non-current liabilities Loans and borrowings Deferred tax liabilities Derivative financial instruments Total non-current liabilities Total liabilities Equity Share Capital Reserves Retained (deficit) / earnings Total equity attributable to equity holders of the Company Total equity and liabilities Group Group Year ended Year ended 2014 2014 Actual Prospectus Variance Notes $’000 $’000 $’000 h i j k l m n 2,393 89,046 8,880 786 71,262 1,632 - 45,064 3,763 402 49,841 - 173,999 99,070 2,393 43,982 5,117 384 21,421 1,632 74,929 302,594 281,117 21,477 70 181 42 - 230 - 302,887 476,886 281,347 380,417 12,500 116,730 2,618 50,613 2,916 4,923 87,311 - 35,748 146 185,377 128,128 91,376 16,525 478 108,379 293,756 46,570 19,504 1,012 67,086 195,214 172,247 172,473 5,965 4,918 183,130 476,886 8,434 4,296 185,203 380,417 70 (49) 42 21,540 96,469 7,577 29,419 2,618 14,865 2,770 57,249 44,806 (2,979) (534) 41,293 98,542 (226) (2,469) 622 (2,073) 96,469 1 When necessary, current year actuals have been regrouped to conform with the classification of the prospective financial information to enable a fair comparison. I PAGE 91 Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Explanation of variances (h) Accounts receivable was $44.0 m higher than PFI due to a larger than forecast amount of sales being achieved in July 2014. (i) Inventories were $21.5 m higher than PFI due to higher than forecast inventory levels in addition to a higher cost of inventory as a consequence of a higher milk price. (j) Property, plant and equipment was $21.5 m higher than the PFI predominantly due to deposits paid for the third dryer forecast for FY15. (k) Net working capital facility is higher than PFI, primarily due to lower than forecast operating cash flows as a consequence of later sales phasing. (l) Trade and other payables are $29.4 m higher than the PFI due to the higher milk price. (m) Trade finance facility was $14.9 m higher than the PFI due to sales phasing being later in the year than forecast. (n) Loans and borrowings are $44.8 m higher than PFI due to higher than forecast capital spend and lower than forecast discretionary repayments. Prospective Cash Flow Statement - For the year ending 31 July 2014 Cash flows from operating activities Cash receipts from customers Cash paid for milk purchased Cash paid to other creditors and employees Goods and services tax refunds Net cash inflow/(outflow) from operating activities Cash flows from investing activities Interest received Group Group Year ended Year ended 2014 2014 Notes Actual Prospectus Variance $’000 $’000 $’000 o p 571,955 (362,551) (141,077) (5,963) 62,364 533,927 (301,319) (146,086) (992) 85,530 38,028 (61,232) 5,009 (4,971) (23,166) 130 193 (63) Acquisition of property, plant and equipment1 q (97,380) (68,713) (28,667) Proceeds from sale of property, plant and equipment Acquisition of intangibles1 Purchases of available-for-sale financial assets 133 (4) (70) - - - 133 (4) (70) Net cash inflow/(outflow) from investing activities (97,191) (68,520) (28,671) Cash flows from financing activities Proceeds and costs from issue of shares Repayment of borrowings Receipt of borrowings Interest paid Net cash inflow/(outflow) from financing activities Net decrease in cash and cash equivalents Net working capital facility at the beginning of the period Net working capital facility at the end of the period 2 r r (301) (743) (17,699) (36,500) 80,638 (7,204) 55,434 20,607 (30,714) (10,107) 62,121 (7,056) (17,822) 34,832 (39,755) (4,923) 442 18,801 18,517 (148) 37,612 (14,225) 9,041 (5,184) 1 When necessary, current year actuals have been regrouped to conform with the classification of the prospective financial information to enable a fair comparison. 2 Net working capital facility is used in the comparison to PFI Statement of Cash Flows for comparability purposes as this is how it was treated in the Prospectus. In the financial statements cash and cash equivalent is used and this will be the treatment going forward. PAGE 92 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDING 31 JULY 2014 Explanation of variances (o) Sales receipts are $38.0 m higher than PFI due to higher dairy commodity prices, partially offset by later sales phasing. (p) Cash paid for milk purchases were $61.2 m higher than PFI due to an increased milk price. (q) Cash purchases of Property, Plant and Equipment are $28.7 m higher than PFI as there has been an acceleration of capital projects. (r) Net borrowings is $37.3 m more than the PFI, due to lower than forecast operating cash flows, increased capital spend and lower discretionary loan repayments. 31 EVENTS OCCURRING AFTER THE REPORTING PERIOD There were no events occurring subsequent to balance date which require adjustment to or disclosure in the financial statements. I PAGE 93 Synlait Milk Limited Financial Statements for the year ended 31 July 2014AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF SYNLAIT MILK LIMITED REPORT ON THE FINANCIAL STATEMENTS We have audited the financial statements of Synlait Milk Limited and group on pages 47 to 93, which comprise the consolidated and separate statements of financial position of Synlait Milk Limited, as at 31 July 2014, the consolidated and separate statements of comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. This report is made solely to the company’s shareholders, as a body, in accordance with Section 205(1) of the Companies Act 1993. Our audit has been undertaken so that we might state to the company’s shareholders those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company’s shareholders as a body, for our audit work, for this report, or for the opinions we have formed. BOARD OF DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The Board of Directors are responsible for the preparation of financial statements in accordance with generally accepted accounting practice in New Zealand and that give a true and fair view of the matters to which they relate, and for such internal control as the Board of Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR’S RESPONSIBILITIES Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and International Standards on Auditing (New Zealand). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of financial statements that give a true and fair view of the matters to which they relate in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates, as well as the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Other than in our capacity as auditor and the provision of financial model assurance services, taxation consulting services and other advisory services, we have no relationship with or interests in Synlait Milk Limited or its subsidiary. These services have not impaired our independence as auditor of the Company and Group. PAGE 94 I Synlait Milk Limited Financial Statements for the year ended 31 July 2014Synlait Milk Limited Financial Statements for the year ended 31 July 2014AUDITOR’S REPORT CONT... OPINION In our opinion, the financial statements on pages 47 to 93: - comply with generally accepted accounting practice in New Zealand; - comply with International Financial Reporting Standards; and - give a true and fair view of the financial position of Synlait Milk Limited and group as at 31 July 2014, and their financial performance and cash flows for the year then ended. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS We also report in accordance with section 16 of the Financial Reporting Act 1993. In relation to our audit of the financial statements for the year ended 31 July 2014: - we have obtained all the information and explanations we have required; and - in our opinion proper accounting records have been kept by Synlait Milk Limited as far as appears from our examination of those records. Chartered Accountants 19 September 2014 Auckland, New Zealand I PAGE 95 Synlait Milk Limited Financial Statements for the year ended 31 July 2014STATUTORY DISCLOSURES WE’RE COMMITTED TO A HIGH PERFORMANCE WORKING ENVIRONMENT PAGE 96 I Synlait Milk Limited Annual Report 2014 Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014 I PAGE 97 STATUTORY INFORMATION STOCK EXCHANGE LISTING Our shares are listed on the Main Board of the New Zealand Stock Exchange (NZX). SHARES ON ISSUE As at 31 July 2014: Register Sub-register Current Holders Zero Holders New Zealand FASTER Class Total 2,884 2,884 1,207 1,207 Units 146,341,197 146,341,197 Last year as at 31 July 2013, we had the same amount of shares of 146,341,197 but these were held by 2,412 holders. TOP 20 SHAREHOLDERS Our top 20 shareholders as at 31 July 2014 are as follows: Rank Name Units at % of Units Bright Dairy Holding Limited FNZ Custodians Limited Mitsui & Co.limited John Penno Mitsui & Co.(Australia) Limited Ben Dingle Citibank Nominees (New Zealand) Limited - NZCSD FNZ Custodians Limited Tea Custodians Limited - NZCSD 31 July 2014 57,247,647 14,898,539 7,373,331 5,423,817 4,915,556 4,543,666 4,240,100 3,946,137 2,150,490 Jpmorgan Chase Bank NA NZ Branch-Segregated Clients ACCT - NZCSD 1,933,774 HSBC Nominees (New Zealand) Limited - NZCSD Juliet Maclean HSBC Nominees (New Zealand) Limited A/C State Street -NZCSD Custodial Services Limited New Zealand Superannuation Fund Nominees Limited -NZCSD Falcon Rural Investments Limited Paul Leslie Lancaster + Bronwyn Anne Lancaster BNP Paribas Nominees (NZ) Limited - NZCSD Horo Holdings Limited Therese Roche 1,402,796 1,298,212 1,288,559 1,257,678 1,223,914 1,101,434 1,098,723 941,186 902,292 900,000 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 39.12 10.18 5.04 3.71 3.36 3.10 2.90 2.70 1.47 1.32 0.96 0.89 0.88 0.86 0.84 0.75 0.75 0.64 0.62 0.62 Totals: Top 20 holders of Ordinary Shares Total Remaining Holders Balance 118,087,851 28,253,346 80.69 19.31 PAGE 98 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014 STATUTORY INFORMATION CONT... SUBSTANTIAL SHAREHOLDERS A “substantial shareholder” is defined in the Securities Markets Act 1988. Shareholders are required to disclose their holdings to us and to our share registrar by giving a “Substantial Shareholder Notice” when: - They begin to have a substantial shareholding (5% or more of our shares). - There is a subsequent movement of 1% or more in a substantial holding, or if they cease to be have a substantial holding. - There is any change in the nature or interest in a substantial holding. The following Substantial Shareholder Notices were received as at the date of this Annual Report: Fully Paid Shares Percentage of Paid Capital Bright Dairy Holding Limited FrieslandCampina Mitsui & Co. Limited 57,247,647 14,634,119 12,288,887 39.1% 9.999% 8.397% This represented an increase in the shareholding of FrieslandCampina from the previous balance as at 31 July 2013 of 10,975,590 shares or 7.50% of paid capital. DISTRIBUTION OF SHAREHOLDERS As at 31 July 2014. Range 1 - 99 100 - 199 200 - 499 500 - 999 1,000 - 1,999 2,000 - 4,999 5,000 - 9,999 10,000 - 49,999 50,000 - 99,999 100,000 - 499,999 500,000 - 999,999 1,000,000 and over Total Total holders 4 30 106 212 439 1,171 479 373 24 24 10 12 2,884 Units 261 3,939 34,358 139,579 556,255 3,236,223 3,042,805 6,753,802 1,577,957 5,821,651 6,629,486 118,544,881 146,341,197 % of Issued Capital 0.00 0.00 0.02 0.10 0.38 2.21 2.08 4.62 1.08 3.98 4.53 81.00 100.00 VOTING RIGHTS Section 16 of our Constitution states that a shareholder may vote at any meeting of shareholders in person or through a representative. Where voting is by a show of hands or voice, every shareholder present (or through their representative) has one vote. In a poll, every shareholder present (or through their representative) has one vote per fully-paid up share they hold. Unless the Board determines otherwise, shareholders may not exercise the right to vote at a meeting by casting postal votes. More detail on voting can be found in our Constitution at the following link - www.synlait.com/site/uploads/2013/07/Synlait- Milk-Limited-Constitution.pdf I PAGE 99 Synlait Milk Limited Annual Report 2014STATUTORY INFORMATION CONT... TRADING STATISTICS Synlait Milk Limited listed on NZX on the 23 July 2013 at an initial share price of $2.20. The trading range for the period 1 August 2013 to 31 July 2014 are as follows (with comparative figures for 2013 included): Minimum: Maximum: Range: Total Shares Traded: DIVIDEND POLICY 2014 $2.60 (5-Aug-13) $4.20 (12-Dec-13) $2.60 - $4.20 34,131,443 2013 $2.61 $2.80 $2.61 - $2.80 11,550,218 The Board has a Dividend Policy to determine whether it is appropriate to declare a dividend for shareholders in any financial year. The policy provides that any decision to pay a dividend will depend on, amongst other things: − Current and forecasted earnings. − Internal capital requirements. − Availability of tax imputation credits, and − Synlait’s debt/equity position. Any dividend can only be declared by the Board if the requirements of the Companies Act 1993 are also satisfied. The Board has determined no dividend will be payable in the period ending 31 July 2014. NZX WAIVERS We have received various waivers from NZX to allow our Constitution and the composition of our Board to reflect our non-standard governance arrangements. Full details of the waivers granted by the NZX can be found at the following link: www.nzx.com/files/attachments/178616.pdf DIRECTORS’ REMUNERATION The total remuneration and other benefits to Directors (and past Directors) for services for the year ended 31 July 2014 were as follows (including comparative figures for 2013): Director Class Position Retired / Appointed Graeme Milne Independent Chairman Bill Roest Independent Audit and Risk Committee Chair Sam Knowles Independent Director John Penno Board Appointed Managing Director Retired & Reappointed 3/12/13 Retired & Reappointed 3/12/13 Retired & Reappointed 3/12/13 Ruth Richardson Bright Appointed Remuneration and Governance Chair Li Ke Bright Appointed Director Yang Suhang Bright Appointed Director Dong Zongbo Bright Appointed Director 2014 - Total Remuneration 2013 - Total Remuneration 96,500 83,000 60,000 55,000 13,696 4,035 661,000 645,765 60,000 55,000 55,000 55,000 50,333 45,333 45,333 45,333 1.Note: As Managing Director, John Penno does not receive director’s fees. His remuneration received in the year to 31 July 2014 listed above constitutes payment for his position as Managing Director and Chief Executive Officer. PAGE 100 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014STATUTORY INFORMATION CONT... DIRECTORS’ INTERESTS Directors’ interests recorded in the Interests Register of the Company as at 31 July 2014 are set out as follows: Nature of Interest Graeme Roderick Milne Director Genesis Energy Limited Chairman New Zealand Pharmaceuticals Ltd Director New Zealand Institute for Rare Disease Research Ltd Chairman Synlait Milk Limited Chairman Synlait Milk Finance Limited Chairman Terracare Fertilisers Ltd Trustee Rockhaven Trust Partner G R & J A Milne Chairman Johnes Disease Research Ltd Chairman Rural Broadband Initiative National Advisory Committee Director Farmers Mutual Group Director Alliance Group Ltd Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Insurance cover arranged by Synlait Milk Limited Member Massey University School of Advanced Engineering and Technology (SEAT) Advisory Board Deed of Indemnity and Access – from SML Sole Shareholder and Chairman of SML New Zealand Limited Shareholder in Synlait Milk Limited Chairman of Pacific T and R Ltd Chairman Rimanui Farms Ltd Ruth Margaret Richardson Chairman, Jade Software Corporation Director Synlait Milk Limited Chairman, Kula Fund Advisory Committee Director Ruth Richardson [NZ] Ltd Receipt of Directors’ Fees from the Company at approved rate SYFT Technologies Limited Chair Chairman Kiwinet Insurance cover arranged by Synlait Milk Limited Chairman New Zealand Merino Company Deed of Indemnity and Access – from SML Director of SML New Zealand Limited Director of Synlait Milk Finance Limited Shareholder in Synlait Milk Limited I PAGE 101 Synlait Milk Limited Annual Report 2014STATUTORY INFORMATION CONT... Willem Jan Roest Director Fisher & Paykel Appliances Ltd Director Housing Foundation Ltd Trustee New Zealand Housing Foundation Trustee WJ & IJ Family Trust Director Metro Performance Glass Ltd Insurance cover arranged by Synlait Milk Limited Deed of Indemnity and Access – from Synlait Milk Limited Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Director Synlait Milk Limited Director of SML New Zealand Limited Director of Synlait Milk Finance Limited Shareholder in Synlait Milk Limited Ms Li Ke Insurance cover arranged by Synlait Milk Limited Employee of Bright Dairy Ltd – substantial Shareholder in SML Deed of Indemnity and Access – from Synlait Milk Limited Director Synlait Milk Limited Director of SML New Zealand Limited Director of Synlait Milk Finance Limited Mr Dong Zongbo Insurance cover arranged by Synlait Milk Limited Employee of Bright Dairy Ltd – substantial Shareholder in SML Deed of Indemnity and Access – from Synlait Milk Limited Director Synlait Milk Limited Director of SML New Zealand Limited Director of Synlait Milk Finance Limited Mr Yang Sihang Insurance cover arranged by Synlait Milk Limited Employee of Bright Dairy Ltd – substantial Shareholder in SML Deed of Indemnity and Access – from Synlait Milk Limited Director Synlait Milk Limited Director of SML New Zealand Limited Director of Synlait Milk Finance Limited John William Penno Trustee John Penno Trust Director Synlait Farms Limited Insurance cover arranged by Synlait Milk Limited Deed of Indemnity and Access – from Synlait Milk Limited Managing Director Synlait Milk Limited PAGE 102 I Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014STATUTORY INFORMATION CONT... Director of SML New Zealand Limited Director of Synlait Milk Finance Limited Shareholder in Synlait Milk Limited Director of Primary Collaboration New Zealand Limited Ian Samuel Knowles Director Trustpower Ltd Director Rangatira Ltd Chairman Umajin Ltd Chairman Partners Life Ltd Chairman OnBrand Ltd Director Magritek Ltd Director SLI Systems Ltd Trustee Te Omanga Hospice Trustee United World College NZ Director Angel HQ Inc Director Com Investments Ltd Director Growthcom Ltd Director Habourside Rentals Ltd Trustee Com Trust and Ian Samuel Knowles Children’s Trust Director Synlait Milk Limited Director Synlait Milk Finance Limited Insurance cover arranged by Synlait Milk Limited Deed of Indemnity and Access – from Synlait Milk Limited Receipt of Directors’ Fees from Synlait Milk Limited at approved rate Shareholder in Synlait Milk Limited DIRECTORS’ SHAREHOLDING IN SYNLAIT The Directors’ respective shareholding in Synlait as at 31 July 2014 is as follows: John Penno Graeme Milne Ruth Richardson Sam Knowles Willem Roest 2014 Directly Held 5,423,817 59,526 46,000 45,000 22,750 2013 Directly Held 5,423,817 59,526 46,000 45,000 22,750 SUBSIDIARY COMPANY DIRECTORS The following Companies were subsidiaries of Synlait Milk Limited as at 31 July 2014. Synlait Milk Finance Limited Directors: John Penno, Graeme Milne, Bill Roest, Sam Knowles, Ruth Richardson, Li Ke, Dong Zongbo, Yang Sihang I PAGE 103 Synlait Milk Limited Annual Report 2014STATUTORY INFORMATION CONT... DIVERSITY We are committed to hiring and retaining the best people for the job – regardless of gender, age, disability, religion, race, sexual orientation, family circumstances, politics and ethnicity. We pride ourselves on having an inclusive working environment that promotes employment equity and workforce diversity at all levels – from factory floor to Board table. In accordance with NZX requirements, our reported gender breakdown at Senior Leadership and Board level as at 31 July 2014 is: Board Senior Leadership Team Female 2 1 Male 6 6 Total % Female 8 7 25% 14% The gender breakdown for the Senior Leadership Team has changed from 31 July 2013 due to a smaller Senior Leadership Team now being in place (dropping from 9 under the former Senior Management Team). EMPLOYEE REMUNERATION During the year ended 31 July 2014 the following employees and former employees received individual remuneration over $100,000: Remuneration range 2014 2013 Number of employees Number of employees $100,000 - $110,000 $110,000 - $120,000 $120,000 - $130,000 $130,000 - $140,000 $140,000 - $150,000 $150,000 - $160,000 $160,000 - $170,000 $170,000 - $180,000 $180,000 - $190,000 $210,000 - $220,000 $220,000 - $230,000 $230,000 - $240,000 $240,000 - $250,000 $250,000 - $260,000 $260,000 - $270,000 $270,000 - $280,000 $280,000 - $290,000 $290,000 - $300,000 $300,000 - $310,000 $310,000 - $320,000 $320,000 - $330,000 $330,000 - $340,000 $340,000 - $350,000 $350,000 - $360,000 $360,000 - $370,000 $370,000 - $380,000 PAGE 104 I 7 6 3 9 3 2 4 2 2 1 1 0 1 0 0 0 0 0 2 0 0 0 0 0 1 1 8 5 4 2 1 3 2 3 0 0 0 0 1 0 1 1 0 0 1 1 0 0 0 0 1 0 Synlait Milk Limited Annual Report 2014Synlait Milk Limited Annual Report 2014STATUTORY INFORMATION CONT... $380,000 - $390,000 $390,000 - $400,000 $400,000 - $410,000 $410,000 - $420,000 $420,000 - $430,000 $430,000 - $440,000 $440,000 - $450,000 DONATIONS 0 0 0 0 1 1 1 0 1 0 0 0 0 0 For the year ended 31 July 2014 we donated $14,000 to charitable organisations. DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE In accordance with section 162 of the Companies Act 1993 and our constitution, we indemnify and insure Directors and Officers against liability to other parties that may arise from their position. This is through the Company and the Directors entering into Deeds of Access, Insurance and Indemnity. Details are maintained in the Company’s Interests Register. This cover does not apply to any liabilities arising from criminal or reckless acts by our Directors or Officers. CURRENCY Within this Annual Report, all amounts are in New Zealand dollars unless otherwise specified. CREDIT RATING We do not have a credit rating. ANNUAL SHAREHOLDER MEETING Our annual shareholder meeting will be held on 2 December 2014 in Christchurch. We will confirm the time and place by notice to all our shareholders nearer to that date. ANNUAL REPORT Our Annual Report and past Annual Reports and Interim Reports are all available on our website at www.synlait.com/investors/ corporate-governance/. We will email our Annual Report to those shareholders who have opted for e-communication with us and our share registry. We prefer to communicate with our shareholders by email without using up valuable printing resources and postage costs, but any shareholder who does request a hard copy of our Annual Report will be sent one in the regular post. FURTHER INFORMATION ONLINE This Annual Report, all our core governance documents (our Constitution, some of our key Policies and Charters), our Investor relations policies and all our announcements can be viewed on our website: www.synlait.com/investors/corporate-governance/. I PAGE 105 Synlait Milk Limited Annual Report 2014DIRECTORY REGISTERED OFFICE 1028 Heslerton Road, Rakaia, Rd 13, New Zealand Telephone: +64 3 373 3000 Email: info@synlait.com BOARD OF DIRECTORS Graeme Roderick Milne (Chair of the Board) – Independent Director LAWYERS Minter Ellison Rudd Watts Lumley Centre 88 Shortland St Auckland 1010 Duncan Cotterill 1 Sir William Pickering Drive Burnside Christchurch 8053 Willem (Bill) Jan Roest (Chair of the Audit and Risk Committee) – Independent Director Ian Samuel Knowles – Independent Director BANKERS ANZ Bank New Zealand Limited The Bank of New Zealand INVESTMENT BANKERS First NZ Capital Securities Limited Goldman Sachs New Zealand Limited SHARE REGISTRAR Computershare Investor Services Limited Private Bag 92119 Auckland 1142 Level 2 159 Hurstmere Rd Takapuna Auckland 06022 Freephone (within NZ): 0800 467 335 Telephone: +64 9 488 8777 Facsimile: +64 9 488 8787 MANAGING YOUR SHAREHOLDING ONLINE To change your address, update your payment instructions and to view your registered details including transactions, please visit www.investorcentre.com/nz General enquiries can be directed to enquiry@computershare. co.nz Please assist our registry by quoting your CSN or shareholder number when making enquiries. OTHER INFORMATION Please visit us at our website www.synlait.com John William Penno (Managing Director) – Board Appointed Director Ke Li – Bright Dairy Director Zongbo Dong – Bright Dairy Director Sihang Yang – Bright Dairy Director Ruth Margaret Richardson (Chair of the Remuneration and Governance Committee) – Bright Dairy Director SENIOR LEADERSHIP John Penno – Chief Executive Officer & Managing Director Nigel Greenwood – Chief Financial Officer Matthew Foster – General Manager Supply Chain Natalie Lombe – General Manager Culture, Capability & Strategy Mike Lee – General Manager Sales Neil Betteridge – General Manager Manufacturing Michael Stein – General Manager Quality & Technical Services AUDITOR Deloitte 50 Hazeldean Rd Christchurch 8024 New Zealand PAGE 106 I Synlait Milk Limited Annual Report 2014Synlait Milk Ltd 1028 Heslerton Road RD13, Rakaia 7783 New Zealand P+ 64 3 373 3000 www.synlait.com

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